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The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of SnoQap, any other agency, organization, employer or company. Assumptions made in the analysis are not necessarily reflective of the position of any entity other than the author(s). These views are subject to change and revision.

Part 2: The Seismic Shift Amongst Private Equity Giants

Part 2: The Seismic Shift Amongst Private Equity Giants

In Part 1, I discussed the role of Private Equity firms within the global economy, with a focus on some of their predatory practices and inconsiderate financial engineering. Much of this stems from the hidden nature of the industry, which keeps them out of the spotlight and away from accurate public scrutiny.

What is somewhat encouraging is that top firms are moving towards greater transparency and public accountability in their operations. What’s more, they are doing it on their own accord! Over the course of the past two years, The Blackstone Group, KKR, Apollo Global Management and Ares Management Corp. have all converted themselves to C-Corporations from partnerships (Gottfried, 2019). This is very much a strategic move on the parts of these private equity giants, as their partnership status has historically prevented them from fully capitalizing on their own assets within the stock market. The “corporation” status has also grown much more attractive since the corporate tax cut from 35% to 21% in 2017. This past week, The Carlyle Group, a similarly affluent and authoritative organization, announced that it would go one step further: starting January 1st, Carlyle will not only convert to a corporation, it will eradicate its dual-class share structure. This monumental development will give shareholders more power, and though a majority of shares will continue to be controlled by Carlyle insiders, the increased reporting and transparency that comes with this status will make The Carlyle Group’s financial activity more open and accessible than ever before (Fonda, 2019). While institutional investors and the general public will not be in the room for every single business decision, there will be a considerable increase in the brain power dedicated to the evaluation of The Carlyle Group. The C-Corporation status increases the incentive on the part of investors to research the value of Carlyle’s portfolio, and opens the door for stronger inquiries and more visible criticism into the firm’s activity on investor calls and through other forms of journalism.

The Carlyle Group stands alone in its wholesale mission of eradicating its dual-share status, but this fact should not diminish the magnificent opportunity that this market development gives to activist investors, as well as the general public on the whole. General measurements of the overall ethical responsibility and moral governance that publicly traded and publicly scrutinized companies face are important indicators of growth in the 21st century. Often referred to with the blanket term ESG, standing for ‘Environment, Social and Governance’, the general measurement of how ethical a given company or firm operates matters within the minds of investors in the public market. 90% of 2,200 academic papers on the subject have found a positive correlation between responsible governance and higher stock prices (Rotonti, 2019). When considering that an increased access to capital markets is the main driver for Carlyle’s decision, the wider and more intense public spotlight onto its operations, and the market’s surefire negative response to poor and inconsiderate corporate governance, has the potential to shape the ethicality of private operations going forward.

Of course, institutional investors themselves are not what one would consider the average Joes and Janes on the street that are greatly affected by unethical operations at the top of our capitalist society. This is not to say, however, that this demographic is destined to be ignored forever. Negative press and outspoken public leaders working against unfavorable corporate activity is also shown to have a noticeable impact on stock prices (Rotonti, 2019). Although swift and considerate solutions are not immediately offered to all families and individuals that may be affected by corporate action, together these financial trends show that a publicly traded company, however large, is not immune to the ill-effects of negative press (Beers, 2019). This helps to substantiate the idea that The Carlyle Group’s actions, among other firms, has ushered in a new era for private equity. Negative press is hard to come by amidst a history of secrecy and closed-door meetings, with critics relying mainly on opinion and hearsay to highlight irresponsibility on the behalf of large firms. Although many of these opinions are strong and, for the most part, correct, effective public scrutiny must rely on legal documents and official corporate releases. Again, investors will not be present at every single closed door meeting held at Carlyle or KKR, and many of their portcos are private firms that are not held to these same reporting standards. But, the increased yearly corporate disclosures that come with newfound status, as well as a smaller tolerance for legal engineering and hidden contracts, provide this to the wider population as a way to hold power to account in the business sector.

As was previously mentioned, swift responses may not necessarily be in store once we collectively get increased information about private equity firms, but the power of an increased and more robust national conversation should not be put to the wayside. An increase in public scrutiny based upon public knowledge opens the door for a better understanding of the distortion in economic control and decision-making in our lives. The newfound legal oversight and the presence of the “court of public opinion” does away with our critical conversations being based off of hearsay, where hope and speculation lead to ignorance to hard numbers and proper valuation. While, of course, this case deals with establishing the unfavorable standing of private equity firms and not the growth potential of a given stock, it is still driven mainly from instinct and not by official fact. This unfortunate circumstance is done away with in the presence of increased public attention. It should be noted that economic efficiency is certainly an upstanding end goal in many ways, and, for reasons too broad and extensive to expand upon in this article, increased efficiency is something that can and should benefit all economic agents. Thus, words and ideas that scrutinize private equity are in no way ignorantly combatting the necessity of operational efficiency within a 21st century economy.

What is undeniable, however, is the inequitable way that the spoils of an increase in efficiency are distributed, and how a short-term increase in value does not automatically indicate that the value will last. Criticism of private equity firms does not revolve around ignoring basic economic principles, but instead the sound ethical philosophy of equitable distribution of value and success. The coming months and years are certainly going to be exciting for economic activists around the country, as the general public will have a stronger call to action in changing how high-level decisions are made within our economy. The shadowy, suited figures that come to mind when we think of the anonymous individuals that control the economy have been thrust into the spotlight, and we should focus on amending their mistakes and permanently changing how power is concentrated going forward.

Works Cited

Appelbaum, Eileen, and Rosemary Batt. Private Equity at Work: When Wall Street Manages Main Street. Russell Sage Foundation, 2014, www.jstor.org/stable/10.7758/9781610448185. Accessed 4 August 2019.

Ayash, Brian and Rastad, Mahdi, Leveraged Buyouts and Financial Distress (July 20, 2019). Available at SSRN: https://ssrn.com/abstract=3423290 or http://dx.doi.org/10.2139/ssrn.3423290

Beers, Brian. “Why do Stock Prices Change Based on News Reports?”, Investopedia, https://www.investopedia.com/ask/answers/155.asp. Accessed 3 August 2019.

Clark, Ian and Morrell, Kevin. “Private Equity and the Public Good.” Journal of Business Ethics, vol 96, 2010, https://link-springer-com.proxy.bc.edu/content/pdf/10.1007%2Fs10551-010-0463-8.pdf. Accessed 1 August 2019.

Fonda, Daren. “Carlyle Group will Become a Little Less Secretive with Its Switch to a Corporation.” Barron’s, https://www.barrons.com/articles/carlyle-group-private-equity-conversion-corporation-51564585925?mod=article_signInButton. Accessed 2 August 2019.

Froud, Julie and Williams, Karel. “Private Equity and the Culture of Value Extraction.” Manchester Business School and Centre for Research in Socio-Cultural Change. 2007. Accessed 3 August 2019.

Geewax, Marilyn. “So, Um, What is a Private Equity Firm?” NPR, https://www.npr.org/2012/01/19/145416791/so-um-what-is-a-private-equity-firm. Accessed 1 August 2019.

Gottfried, Miriam. “Blackstone to Become Corporation, Swapping from Partnership Status.” The Wall Street Journal, https://www.wsj.com/articles/blackstone-to-become-corporation-swapping-from-partnership-structure-11555588261. Accessed 1 August 2019.

Manis, Jerome. America’s Downward Spiral: A Call to Action. Xlibris, 2008.

Maremont, Mark. “Romney at Bain: Big Gains, Some Busts”. The Wall Street Journal, https://www.wsj.com/articles/SB10001424052970204331304577140850713493694. Accessed 3 August 2019.

Mohler, Jeremy. “The Secretive Industry Turning Trump’s Immigration Crackdown into a Global Cash Cow.” Medium, https://medium.com/in-the-public-interest/the-secretive-industry-turning-trumps-immigration-crackdown-into-a-global-cash-cow-bd0f6fa427c. Accessed 2 August 2019.

Morgenson, Gretchen. “Entering the Secret Garden of Private Equity.” The New York Times, https://www.nytimes.com/2014/12/28/business/entering-the-secret-garden-of-private-equity.html. Accessed 3 August 2019.

Rosenberg, Eric. “The 8 Best Private Equity Firms of 2019.” The Balance, https://www.thebalance.com/best-private-equity-firms-4583955. Accessed 31 July 2019.

Rotonti, John and Lomax, Alice. “Does ESG Investing Produce Better Stock Returns.” The Motley Fool, https://www.fool.com/investing/2019/05/22/does-esg-investing-produce-better-stock-returns.aspx. Accessed 4 August 2019.

Segal, Troy. “Understanding Private Equity.” Investopedia, https://www.investopedia.com/articles/financial-careers/09/private-equity.asp. Accessed 19 August 2019.

Teather, David and Trainor, Jill. “Private Equity: The Human Cost.” The Guardian, https://www.theguardian.com/business/2007/feb/23/privateequity1. Accessed 2 August 2019.

Unglesbee, Ben. “Is the road to bankruptcy paved by private equity?” RetailDive, https://www.retaildive.com/news/the-road-to-bankruptcy/540617/. Accessed 19 August 2019.

The Symbiosis Between Art and Science

The Symbiosis Between Art and Science

Part 1: The Seismic Shift Amongst Private Equity Giants

Part 1: The Seismic Shift Amongst Private Equity Giants