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Private Equity Gone Public

Prepared by: Lee Hudson Teslik
Updated: June 28, 2007

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Having long sailed beneath the regulatory radar, private equity firms all of a sudden find themselves the target of congressional attention. The June 21 initial public offering (NYT) of the buyout behemoth Blackstone Group drew headlines, not least for the massive payouts the IPO brought the company’s cofounders Stephen Schwarzman and Peter G. Peterson. The day after Blackstone went public, a group of Democrats in the House of Representatives proposed legislation (Reuters) to more than double tax rates on the pay of hedge fund and private equity managers. Across the Atlantic, British parliamentarians whipped up their own storm with Tory MPs opening an investigation into private equity firms’ earnings and threatening parallel tax hikes (BBC). But should the bills pass, the resulting clampdown would reach well beyond the cloistered world of high-finance.

Private equity, loosely defined as any investment that isn’t publicly tradable—though the term is often used more specifically to refer to groups investing in publicly-owned companies with the intent of taking them private—has seen banner growth of late. Private equity (PE) firms are expected to raise $500 billion in 2007, a 16 percent jump from a record year in 2006, according to data from the British research company Private Equity Intelligence. This expanding influence weighs heavily on global institutions like the World Bank and International Monetary Fund (IMF), as private lenders increasingly are able to provide loans to developing governments on preferable financial terms and without political strings. This April the IMF lashed out, railing against PE firms in its annual report on global financial stability. The report criticizes irresponsible PE buyouts, saying they threaten to destabilize international banks. Indeed, the report says the possibility of a PE meltdown ranks among the biggest risks facing the global economy.

The very fact of Blackstone’s IPO added to speculation that the sector’s run might soon be up. Despite the looming regulatory clouds, Blackstone’s offering netted solid gains and the Wall Street Journal went so far as to compare it to Netscape’s heady 1995 IPO (though Blackstone’s shares flagged in the days that followed, giving up their initial gains). Now the British PE firm Kohlberg Kravis Roberts & Co. says it too will go public. All this has some analysts whispering “bubble.” The FT’s Alphaville blog quipped Blackstone speculators are “buying into the notion, though not the reality, of private equity when it looks just too bubble-icious for words.”

For all the criticisms, however, private equity begs sober analysis. A New York Times editorial argues the private equity sector should be able to weather a tax hike and says Congress would be acting in the name of fairness to pass the proposed legislation. The Economist also cautions against inflated predictions of the sector’s demise, pointing out that major PE firms are sufficiently diversified to ride out a bumpy period. Still, a Financial Times op-ed warns against legislating against PE firms, saying public animosity may be a function of “broader hostility towards big business and globalization” and adding that the consequences of a clampdown could drain much-needed liquidity from financial markets.

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