Mannerisms

The private equity people are temporary owners, hoping to sell on at a profit. If the stock market is now valuing industrial assets much lower than it was two weeks ago, and may discount them further, how can the private equity firms sell them at a profit?

There are only three ways for a private equity company to make its money: an IPO, a trade sale to a company usually in the same industrial sector, or a sale to another private equity company.

Falling valuations raise the horrible spectre of having to sell at a loss. Just as borrowing allows you to buy much more than you can pay out of your own pocket, so selling highly leveraged assets at a loss means you take a much bigger hit than if you had used your own money throughout.

To avoid that, the private equity people might have to try and manage the companies they own so well that they're worth more than they paid for them despite the market drop. That sounds like hard work.

The Wall Street Journal's breakingviews.com column comes up with three guidelines for the private equity companies:

1. Disclose the industrial plans for the companies they buy.

2. Disclose how they are financing the purchases.

3. Disclose how they make their profits.

Then we'll see if the profits come from hard work, or from rising markets, piling on debt and exploiting tax loopholes.

The WSJ says: "If buyout firms are making good returns as a result of hard work, they have something to be proud of. If not, hiding in the shadows won't help."

It could be we're about to find out.

Just as we did with the junk bond guys.