Private equity firms usually buy firms with a little bit of equity and lots of debt. Deals are always marked by high upfront fees for the firms. Despite the mythology, private equity deals are not always successful, but private equity is private. Unlike open markets where valuations are simply a matter of reading the stock ticker, private equity values its own assets and tells investors in annual reports about losses long after the write downs have occurred. For example, Last September Blackstone and TPG, two private equity firms valued their interest in Free-scale Semiconductor at the price they paid. The reality is probably much worse since Freescale’s debt trades at a heavy discount of about 82 cents on the dollar. Worse, since private equity firms are not subject to regulations that affect public companies their investors don’t always get their checks. Private equity firms can hold onto the profits from the sales of holdings or from generous dividend payments from portfolio companies and are not required to distribute the funds.

With the beginning of a recession, there are fewer pension funds to fleece, so private equity has gone after sovereign wealth funds. Sovereign wealth funds by definition are run by politicians. I have no doubt that they will be every bit as gullible as pension trustees. Look for more huge Wall Street bonuses, but at least these will be at the expense of the Chinese, Russians and the poor citizens of Middle East oil producing countries

William Gamble
Author: Freedom: America’s Competitive Advantage in the Global Market
EMERGING MARKET STRATEGIES
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