Unless, of course, you make your money in a way that is distasteful or downright illegal.
PREVIOUS COLUMNSJuly 8: Investors are playing it safe, possibly to their detriment
July 1: Midyear good time to pause, refresh portfolio positions
May 27: Markets have their risks, but optimism has a place
May 20: Private-equity wave may have troubling ripple effects
March 25: Stock market stays resilient, but some risks are on the horizon
Feb. 25: Risk-adverse investors may regret heavy bond investments
Feb. 18: Market's fed obsession leaves scant room for anything else
Jan. 14: Giant funds post big returns, but may contain some risks
Dec. 24: The sky didn't fall in '06, and that was good enough
Dec. 17: It's not just about double-digit returns
Nov. 12: Protectionism in congress may spark inflation pressures
Oct. 15: Growth stocks may shine, but value still has its place
Sept. 17: As market tiptoes higher, bulls see many opportunities
IN THIS PACKAGE
- Hot streak illuminates utility sector's strength
- Reward cards promise perks, but beware of traps
- Private-equity wave may have troubling ripple effects
- It could be too risky to use equity for college
- The savings game
- The Leckey file
- Getting started
- Spending smart
- Can they do that?
- Taking stock
- Keeping eye on hedge funds
- The week ahead
See more topics »
The public-to-private wave has an inescapable aura of exclusivity to it, because, well--that's the point: Some of the most brilliant financiers on Wall Street take money from well-heeled investors, borrow on top of that, buy up businesses, remake them out of the public eye and eventually sell them for what all parties involved hope is far more than the purchase price.
So it is that one of the largest private-equity players, Cerberus Capital Management LP, struck a deal last week to take control of the Chrysler Group from DaimlerChrysler AG.
Standard & Poor's Corp. now counts 12 companies within the blue-chip S&P 500 stock index that have buyout offers on the table from private investors. The list includes utility company TXU Corp., retailer Dollar General Corp. and eye-care products company Bausch & Lomb Inc.
So what's not to like about that? The public-to-private wave has helped push the stock market to record highs and is a bonanza for shareholders of the buyout targets.
But here's the question that Jeffrey Bronchick, who helps oversee $3.7 billion at money manager Reed Conner & Birdwell LLC in Los Angeles, wishes more of his fellow investors would ask: What are public shareholders giving up in future returns by selling out today?
A private-equity buyout that includes existing company management as participants (the normal terms) is riddled with conflicts of interest from the get-go, Bronchick asserts. He notes that it's in the interest of management, and the private-equity investors, to pay as small a takeover premium as they can get away with, because that will enhance their future returns.
When private equity seals a deal, Bronchick says, "They're buying my upside"--meaning what he might have earned if the company had remained public and prospered.
That also was the knock on the leveraged buyout deals of the late 1980s. The key distinction often made between that privatization boom and this one is that today's private-equity investors say they're interested in building up the businesses they buy, not stripping them down and selling the pieces.
The Private Equity Council, a lobbying group formed five months ago by Apollo Management, Bain Capital, The Carlyle Group and other buyout-industry leaders, has been touting a recent study by consulting firm A.T. Kearney Inc. that bolsters the argument that private-equity ownership aids companies' growth and job creation. Private-equity-backed firms created about 600,000 new jobs in the U.S. from 2000 to 2003, according to Kearney.
Testifying at a hearing held last week by Rep. Barney Frank (D-Mass.) to assess the effect of private-equity deals on workers and companies, Douglas Lowenstein, president of the Private Equity Council, also stressed the high returns that private-equity managers reap for their investors--including pension funds--as companies are sold or taken public again via stock offerings.
But those hefty returns became ammo for the Service Employees International Union, which also testified at Frank's hearing. Workers, the union said, are being shortchanged while private-equity magnates roll in dough.
Another party that believes it is being shortchanged in the private-equity boom didn't have a seat at Frank's hearing: the bond investors who are helping to finance the public-to-private wave.
Bond investors have for months bemoaned the private-equity industry's increasing use of creative financing that essentially gives lenders fewer rights if a buyout company begins to have trouble paying its debts.
The suspicion is that, well before any debt problems arise--leaving lenders in a pickle--many private-equity investors will be able to extract handsome cash returns from their companies.
Bond investors found an ally last week in Federal Reserve Chairman Ben Bernanke, who said that financing for private-equity deals posed "significant risks" for banks, and that the Fed was taking a closer look.
Shareholders may feel that private-equity investors are stealing their companies, and workers may believe they aren't fairly sharing in the wealth. But Bernanke raised the most serious risk of all--that the private-equity mania could give way to the next major U.S. debt crisis.
Tom Petruno is a columnist for the Los Angeles Times, a Tribune Co. newspaper.