Private equity, public markets and Maxwell Smart

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The other day I was honored to receive the first-ever Maxwell Smart Prize for Mediocrity in Financial Journalism, from the private-equity blog Going Private. The citation declared that my offense was the sentence (regarding the Blackstone Group’s rumored IPO):

It does nicely underscore the basic truth of the private equity business, which is that without public markets on which to buy and sell companies, it couldn’t exist.

There was no explanation of just what was so bad about the statement, and I defended it as true. But in an e-mail that she has kindly agreed to let me share with my readers, my new favorite smug young private equity blogger explains the true nature of my egregiousness:

No, it is not true, actually. I didn’t explain because I doubt my
readers need it spelled out for them.

What IS true is that big public -> private -> public transactions
make the headlines because they make for good copy. They are,
however, a very small part of “private equity.” Most private
equity is boring. Too boring to make the likes of Time. (Though
it still interests me that no one bothers to recognize the risk
taken even by the sponsors of these deals and insists instead that
public shareholders who willingly provided their proxy have somehow
been cheated). I’ve pointed this out any number of times on the
blog. Do take some time to peruse the items in “The Business

My firm, for instance, will likely never IPO a firm and fewer than
10% of our deals have been “take private” transactions. We have
very little to do with the public markets (excepting that we have
many more excellent managers happy to work for our daughter firms
and flee from the insanity that is SarOx and the public capital
markets). Yet we employ thousands, have grown each of our
companies in employees and revenue every year.

To insist that without public markets the private equity business
“couldn’t exist” is insulting to the people in the business who
actually work on improving companies (rather than just balance
sheets) for a living. This constant myopic view perpetuated in the
press (irresponsibly in my view) leads to daft regulatory moves
likely to badly twist the economy into a knot. (Of course, we’ll
blame that on the hedge funds).

In case you haven’t heard, Milton Friedman is dead. There are
precious few champions for free markets anymore. The irony is that
if you just leave the mega deals alone the “problem” (are
responsible, sophisticated actors acting in a nearly frictionless
market a PROBLEM?) will solve itself anyhow (Carlyle recognized
this months ago, as did I- publicly). The credit markets are
smarter than the both of us. Believe me. Muck about and you’re
likely to tar the real engines of buyouts and growth with the same
brush. Add to that the coming tax hike and I’m damn glad I’m in
London and not New York.

Your reporting is irresponsible because you don’t care enough to
understand the subject matter. The result is that you perpetuate a
fiction, namely that big mega-buyouts and their LIPOs constitute
the universe of private equity. I’m amused (sardonically amused)
that you use the moniker “Capitalist,” frankly. But, perhaps going
deeper is harder to do with the little copy you are afforded.

So there you have it. Want to know more? Read her blog. It’s pretty danged good.

I still think my statement was true, though. First, all the really big private equity deals undeniably need public markets to work. And my sense is that even the great mass of smaller private equity transactions wouldn’t go nearly as smoothly if there weren’t open, transparent, public equity markets out there providing a backdrop. As I’ve written before, private equity offers a really useful complement (one that really didn’t exist before the late 1970s) to the public company and the traditional private firm. But it’s never going to entirely replace them.