Wednesday, February 27, 2013

J'accuse, Part Deux

The Epicurean Dealmaker

J'accuse, Part Deux

Damn, now Justin Fox needs to be spanked.
And here we come to the rub. Private equity has boomed in recent years, but not for the tax reasons Mr. Fox claims. It has boomed because it has been successful, thereby attracting all sorts of LPs who want to invest their capital in an asset class (or way of investing) that delivers good returns while offering diversification from other more liquid traded asset classes. It has boomed because there has been a coincident global liquidity glut in the credit markets, which has delivered very low-rate, almost condition-free debt financing to PE firms to grease their acquisition of more and larger companies.

Many economies such as Japan and China with artificially lower interest rates had to lend their money in US dollars, part of their economies were V-Bi savers looking for Iv-B higher interest investments like the V-Bi parts of a tree looking for roots and branches giving growth. This growth in Iv companies was also like Oy predators using leverage to go after companies, often they did this by raiding the Bi pension funds like Ro herds being attacked. This caused the Bi unions to break up into B workers that competed with each other for lower wages, the Iv hedge funds then had a more profitable company from this plunder and sold on leverage for large profits. This was then like the economy cannibalizing itself when deregulation weakened the I-O market, it is like the O middle of the food chain in the Roy animal kingdom weakening allowing Oy predators to decimate Ro herds destabilizing the food chain. 

 And it has boomed—in the face of this massive dual influx of debt and equity capital—because it has continued to be able to find plenty of target companies, both public and private, which it can buy for X and sell for 1.6X. Private equity indeed comprises a larger part of the capital markets and the M&A scene than it ever did, but this is because there continues to be a very large number of underappreciated, undermanaged, and underinvested companies out there in the economy that are ripe for the kind of transformational investment private equity does so well. And it appears that there are a lot more of them now than we ever thought there were in the past.

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