The funniest remark of last week came from the unlikely source of a private equity magnate.
George Roberts, co-founder of Kohlberg, Kravis and Roberts the idiot Wall Street outfit which bought NXP at the top of the semiconductor cycle in 2006 at a valuation of $11.6 billion and then imposing annual interest payments of $480 million on it, so pushing NXP to the point of bankruptcy, proclaimed:
"Private equity is inherently a long-term asset class. Our success is never predicated on short-term gains or single-quarter valuations, but on working to improve the operations of our portfolio companies over years and through economic cycles. We believe that we have positioned the companies in KPE's (KKR's private equity owned companies) portfolio well for an extended period of slower global growth by managing costs, anticipating refinancing issues and de-leveraging. We maintain our adherence to our core values of patience, discipline, multi-faceted shareholder engagement and strong corporate governance, as these are the best ways we know to grow and improve businesses in the long run."
In financial circles it's the pompous people who tend to gain the most credibility even if, like Conrad Black whose pomposity is spectacular, they are the most frightful rogues.
As Ralph Waldo Emerson put it: "The louder he talked of his honour, the faster we counted our spoons."
After taking over one of the finest semiconductor companies and bringing it to its knees, it is absurd for Roberts to talk about positioning the company 'well' or 'managing its costs', or 'de-leveraging' - when his company imposed this obscene level of leverage in the first place.
US and UK governments made this kind of thing possible when they gave special tax treatment to private equity companies which allowed them to grow into massive instruments of industrial destruction.
When all this financial misery is over, the US and UK governments should pass a law making it illegal for companies taking over other companies to impose levels of debt on them which drive them into the ground.
TOMORROW MORNING: TEN BIGGEST SEMICONDUCTOR APPS
Ruud, Richard, Ian, My apologiesd for this post being empty previously - Gremlins in the system, but thanks for pointing this out.
extracts from Moneyweek 6 March......
Never mind Sir Fred’s pension – get ready for the next crisis
The backlash over his pension will look like nothing more than a mild disagreement between friends compared with the political storm about to erupt over the private-equity industry.
It's already obvious to anyone who cares to look that the next, and potentially most painful, stage of the credit crunch will be the collapse of a string of firms owned by the buy-out funds.
On Monday, Candover, a pioneer of the private-equity industry, and one of its smartest players, reported a truly terrible set of results. It cancelled its dividend, scrapped plans to invest in a fresh fund, and said it was looking at job cuts. Its shares have fallen from £22 as recently as last August to just over £2 now. The news is just as grim elsewhere.
KKR said this week the value of its publicly quoted funds dropped by a third in the latest quarter.
And 3i has watched its shares slump from a peak of £11 to less than £2 now.
In America, shares in Blackstone, the world's biggest quoted private-equity group, have fallen from $30 to less than $5 now.
The funds loaded up company balance sheets with lots of debts, sliced and diced it a dozen different ways, then sold it on to hundreds of different institutions, all the while generating huge fees for the funds themselves and their bankers.
Inevitably, there will be collapses. In a deep recession, the one thing a company needs, just like an individual, is a strong balance sheet.
Amid the arguments and recriminations, companies will collapse into insolvency.
When this happens, the anger will make the outrage over banking bonuses look mild.
...the private-equity firms own huge companies, employing tens of thousands of people, including the likes of Iceland, the AA, Kwik Fit and Travelodge. Jobs will be lost, houses will be repossessed, and pensions will be destroyed. On some estimates, as many as one in five private-sector workers in Britain are ultimately employed by the buy-out funds. The impact on ordinary people's lives will be huge.
Neither the industry or the government will escape the fall-out.
...fortunes were made by manipulating balance sheets, and leaving them in such poor shape that thousands of people lose their jobs, there will be a lot of anger out there.
...either through ignorance or carelessness, it is being ignored – at least until the first major insolvency hits the headlines.
Annymous, your are absolutely right, and your remark eerily predicts my next post coming up in about an hour. It's because the silly geese bankers were persuaded by PE companies to fund PE's increasingly ridiculous takeovers, that the takeovers were able to happen in the first place. And Western governments gave the PE people special tax treatment to encourage them to do the takeovers! Now the governments are buying up this commercial paper which the banks bought so the governments can get the banks lending again.
So, on top of the banks stupid purchase of sub-prime mortgages, the banks made stupid purchases of bonds to fund stupid takeovers.
And loads of so-and-sos are sunning themselves in salubrious places on the fees they took for this value-destruction.
We are all paying so a few of these 'banksters' can live like Riley.
You may find this lecture interesting:
http://www.academicearth.org/lectures/stephen-schwarzman
Stephen Schwarzman of Blackstone talking about the world of PE. It was recorded in April 2008. I would be very interested to know what he would have said were he giving such a lecture today.
Thanks for that Ian. I'm impressed by Schwarzman's statistic that institutions only invested 4.5 per cent of their assets in private equity in April 2008 - shows that the institutions don't fall for every smoothie Wall St salesman. And how embarrassing for the guy who runs Yale's endowment fund to be publicly praised by Schwarzman for investing16 per cent of his fund in private equity companies! Bet he's as sick as a dog today.
Why wait until the financial misery is over ?
You're so right, Mike, they should do it now. Hopefully Pres Obama will show the way. I get the feeling Gordon's a bit frit about putting the boot into the moneymen.