Home Technology Private Equity and The New Tycoons

Private Equity and The New Tycoons

Private equity is ill-understood by the general public because it is private. They don’t have to file statements with the SEC, all they have to do is inform their limited partners on how they are doing.

Jason Kelly gives us a neutral view of what is going on in private equity. I think he is neutral, because he does not come across as a fan or a critic. Personally, I think that is hard to do with private equity, because 1) it is easy for some to become amazed at the success of some incredibly wealthy and clever businessmen, or 2) it is easy to take offense at these shadowy capitalists that have produced bankruptcies, fired many people, and have been very clever at using the tax code to pay minimal taxes.

Both of these views are caricatures and the truth does not lie in-between but embraces both views. Indeed, in many cases, jobs have been preserved or created through private ownership of firms. Many firms might have died without private equity restructuring the company, leading to the loss of all jobs.

Jason Kelly takes you through all aspects of private equity:

Fundraising
Leverage
Dealmaking
Operations
Exiting (Selling)

He also introduces you to all of the major private equity shops, and their leadership.

One thing the author highlights in the book is the pervasiveness of private equity. He notes how many businesses are managed by private equity. In general, these are businesses with steady cash flows that can service the debt that the private equity funds borrowed to buy them.

Some private equity firms are passive, and don’t try to improve operations. Others make a great effort to grow the companies, hiring new people in the process, and taking risks to create a better company. It depends on the philosophy of the private equity owners.

The book does note the favored tax status of carried interest, but takes the position that the private equity investors are following the law, and that they will follow the law should it be changed. (My simple idea is that interest should not be taxed, or be a tax deduction.)

The book does note trends:

Private equity is becoming more public, as more large private equity firms go public.
Complexity inside private equity firms is growing as they broaden the scope of services that they provide.
The owner/founders are moving on, and a new generation of management is taking the reins.
Returns may be falling as private equity gets larger.

In all, a good book, but one that may leave partisans unsatisfied. It does not demonize or engage in hagiography.

Quibbles

None.

Who would benefit from this book: Anyone wanting to learn about private equity would benefit from this book. If you want to, you can buy it here: The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything (Bloomberg).

Full disclosure: The author’s PR Flack sent me a preprint and a copy of the book.

If you enter Amazon through my site, and you buy anything, I get a small commission. This is my main source of blog revenue. I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip. Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book. Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website. Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites. Whether you buy at Amazon directly or enter via my site, your prices don’t change.

By: alephblog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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