Any number of interest groups have decried private equity with any number of motivations and for any number of reasons. I read with interest, therefore, a rather interesting, if short, piece in the Economist on the topic of the losers in the private equity and hedge fund binge. This particular passage is particularly insightful:
Private-equity funds profit by arbitraging between private and public markets, exploiting their different attitudes towards debt for example. In 1989, Michael Jensen of the Harvard Business School argued that the owners and managers of quoted companies were doomed to squabble over cashflow. “The pressure on management to waste cash flow through organisational slack or investment in unsound projects is often irresistible.”
By gearing up companies, private-equity groups withdraw managers' freedom to decide what to do with cashflow. In theory, this maximises the value of the firm. The losers are the shareholders of public companies who miss out on these gains by selling too early. Shareholders are suspicious of too much debt on the balance sheet, perhaps because heavily geared firms have more volatile profits.
Indeed. But it seems pretty hard to be sympathetic to these "losers," much less propose protecting them from themselves in some paternalistic regulatory fashion. The wonderful thing about the free market is that it permits the dense to pay for their mistakes. This tends to weed out the dense, a goal, in my opinion, that is highly desirable.
