Friday, June 22, saw the stock market debut of The Blackstone Group, the biggest and splashiest of the private equity funds that have pretty much dominated the financial scene for the past several years. Investors poured $4 billion into the firm, buying stock that would give them no voting rights in the hope of getting a piece of the profit-spinning energy that Blackstone and its colleagues have created in recent years.
They should be so lucky.
Over the years, hedge funds have gotten a lot more press than their private equity (PE) counterparts, but Blackstone’s initial public offering (IPO) has changed that. There are considerable similarities between hedge funds and PE. Both consist of pools of capital contributed by institutional investors, like pension funds and university endowments, as well as some very rich individuals, and are run by a relatively small group of very highly paid money managers. But their investment styles are generally rather different. Hedge funds move in and out of positions often with lightning speed. PE operates on a longer time scale. Their typical modus operandi is to buy up whole companies (public companies, whose shares trade on the open markets), take them private, slim them down and sell them–either to other companies, or to float their stock on the markets afresh, after having worked their magic on them.
The numbers surrounding PE are huge. There are more than 170 funds with $1 billion or more in assets. They collectively raised $221 billion last year from outside investors, up sevenfold from a decade ago, and did $475 billion in deals, thirteen times as much as just five years ago. This flood of money has helped drive the stock market back past its 2000 highs, first reached at the peak of the dot-com mania.
Who has benefited from all this? Apologists like to say all of us, since it’s made our economy more efficient and our pension funds fatter. But the economy of the past several years has been lackluster, with GDP growth unimpressive and wages barely growing. Half of us don’t have a pension plan, and most of those who do don’t have all that much in their retirement accounts. Even the institutional investors who’ve poured all those billions into PE funds (and hedge funds) haven’t done spectacularly well. Most people who study the matter conclude that the returns aren’t all that great, especially considering the risks involved.
But there’s no doubt that some people have made out like bandits from the PE racket: the fund managers. They pay themselves huge fees at every turn. There are management fees (deducted from the outside investors’ returns), as well as fees billed to the companies that the funds own (consulting fees, monitoring fees–even termination fees when the firms are sold or go public). And there are the (typically huge) profits when the managers sell the firms they’d bought only a few years earlier.