Despite Increased Scrutiny, Private Equity Attracts and Retains Top Investment Professionals
Private equity has captured headlines and come under increased scrutiny in recent months. Not only have government agencies proposed legislation, regulation and taxation, labor organizations have also come forward promoting workers interests and greater transparency. This may come as no surprise. The asset class has enjoyed exponential growth. This year, private-equity deals totaling $443.2 billion have been announced, surpassing last year’s record $441.1 billion, according to Thomson Financial. Private equity investment advisory firm, Franklin Park Associates, says private equity has become a significant player in the global economy and capital markets, generating huge profits for general partners. Executive recruiting firm, A.E. Feldman, says firms have considerable leverage in attracting the best talent as industry trends increase private equity opportunities and drive up compensation.
Wall Street dealmakers are remaking the U.S. economic landscape. Today, some leading U.S. businesses are owned by private-equity firms. Among them: Metro-Goldwyn-Mayer, Toys “R” Us, Dunkin’ Donuts, and Neiman Marcus. According to research compiled by Franklin Park Associates, nine of the largest ten private equity deals on record were completed since 2005. Topping the list, Equity Office Properties was sold in 2007 to Blackstone in a deal valuing $39 billion. Coming in second at $33 billion, Hospital Corp. of America was sold to Bain & KKR in 2006. The sale of RJR Nabisco in 1989 to KKR for $31 billion (the focus of the best-selling book Barbarians at the Gate) comes in third.
Although there is concern about the buyout binge, private equity firms say they are focused on making the companies they buy stronger and more efficient, creating value for investors. But as the industry matures, dealmakers are being pressed to become more transparent.
Private equity firms have become increasingly public, a reflection that the environment for raising money is becoming more challenging. Such offerings have given the firms access to huge amounts of capital. According to Franklin Park, such public offerings of interests in private equity firms are typically structured as master limited partnerships or limited liability companies to take advantage of pass through tax treatment. And filings disclose that transparency will be limited and governance remains in the control of the managers.
Blackstone Group, the second-largest LBO firm, held its highly publicized initial public offering back on June 21. While the SEC was reviewing the Blackstone offering materials, however the AFL-CIO drafted a letter advocating that the SEC require Blackstone to register as an Investment Company. As such, Blackstone would be subject to greater transparency, fee restrictions and governance requirements similar to those imposed on mutual funds. Blackstone argued it was an active investor that is exempt from the Investment Company Act and ultimately the SEC agreed, allowing the public listing to occur as registered.
In another attempt to increase private equity transparency, the Service Employees International Union (SEIU), the nation’s fastest-growing labor union says the buyout boom is also affecting hundreds of thousands of workers nationwide. The SEIU has called for increased consideration of workers interests. The group recently issued a report challenging the lack of transparency and the income disparity created by private equity. The SEIU recommended that private equity increase transparency, support the equitable payment of taxes and build confidence in the securities markets by eliminating conflicts of interest. The union also concluded that workers and communities should have a voice in private equity transactions and benefit from their outcome. Private equity firms contend transactions have achieved all of the SEIU’s recommendations.
Despite the increased scrutiny and controversy surrounding huge wealth creation, many assert that private equity is a valuable source of job creation, providing a boost to the economy. Rep. Eric Cantor, R-Va. and chief deputy minority whip, says that private equity partnerships have become a key source of capital for low-income housing, energy exploration and medical innovation, not to mention the turnaround of struggling companies. Private equity created about 600,000 jobs from 2000 to 2003 alone. And as private equity remains a significant player in the global economy and capital markets, generating huge profits, the industry will continue to attract top investment professionals.
