The Populist Case Against Private Equity

Marc Andreessen posted a cute blog entry yesterday listing 14 questions any prospective investor in a private-equity fund should ask of its managers. The main problem with the list is that any private-equity professional should be able to deal with all 14 very easily: none of the questions are all that tough. But they are germane.

Andreessen clearly has little time for private equity: if he wants leverage on the S&P 500, he says, he can get that by buying call options, avoiding huge private-equity fees, as well as the risk that the specific fund in question will not be one of the 10% of funds which tend to make the most outsize profits. It's a good point.

And Andreessen isn't above a little populist ribbing, either:

When one of your pet management consultants or operating partners walks into the tire company you just bought, wearing his $3,000 Zegna suit, $400 Turnbull & Asser shirt, $80 Pantherella cashmere socks, $600 A Testoni alligator loafers, $5,000 Omega watch, $500 Gucci cufflinks, and $150 Hermes tie, what exactly is he telling the general manager of that tire company about running that business that the general manager didn't already know?

The answer, of course, is that most companies aren't, actually, run as profit-maximizing machines. Think of yours. Is your whole working life devoted to making the absolute greatest possible amount of money for your company's owners? Maybe if you work for a bank, it is. But in the old-school, often family-run industries which private equity targets, there's often a much more collegial atmosphere, where managers and employees form a healthy team which looks after, rather than firing, its weakest members, and which has an eye on happiness and legacy and corporate longevity rather than growth and profit at all costs.

This, of course, is exactly why the French, among others, are so mistrustful of private equity...

(HT: TED)