Saturday, November 29, 2008

Spending other peoples' money

When I first heard about the new bunch of barracudas called private equity some years back, I had the worst possible feeling. It's a group of investment bankers and stockbrokers who decided that they needed to move away from the straitjacket of regulations that licensed investment bankers and stockbrokers are subjected to constantly.

You may say that given the financial markets turmoil, even regulations failed. Fair enough. But, private equity firms were also contributory.

If ever there was an new embodiment of reckless greed it would have to be the high net worth individuals who put substantial amounts of their wealth into private equity funds.

The difference between private equity funds and funds operated by investment banks and financial institutions is that the former is completely unregulated. It is governed purely by private contracts signed between the private equity firm and the high net worth individuals.

I haven't seen any such contracts but I would imagine that the wily private equity people must have templated the standard contracts filled with exclusion clauses used by the licensed investment banks and financial institutions except that the private equity investment contracts probably had more trapdoors.

Now the investors of private equity funds have to hang on for their dear financial lives. You can't sue, you can't sell. I feel like a financial version of Simon Cowell berating the investors.
http://renajoy.files.wordpress.com/2007/10/wealth1_small.jpg.
The unkindest cut may be the mark-to-market rule that I have blogged about innumerably. No more true and fair bullcrap. The new accounting rules will force the private equity funds to state it like it is, serious diminution of value of investments all around.

But, as F. Scott Fitzgerald said, Let me tell you about the rich. They are different from you and me. So, there's no need for any concern about them. One less jar of caviar. One less Ferrari. Oh, well, back to using the Rolls, then.

Wonderful device, private equity. In every decade, there are new ways for spending other peoples' money. In this decade, private equity is it.

For a slightly different take on this, read this Economist piece.

5 comments:

masterwordsmith said...

de minimis,

I see you have a bout of verbal diarrhoea :-p today...kidding

Btw, I also love Fitzgerald. Perhaps a debate about The Great Gatsby one day?

cheers

de minimis said...

:D

Hasbullah Pit said...

Semalam saya ke ceramah Umar Vadillo, dia mengatakan bahawa sebenarnya tidak wujud "minority owner",

minority owner hanya meminjamkan wang untuk digunakan oleh majoriti owner.

susah juga untuk diterima akal.

walla said...

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de minimis said...

Hasbullah

Saya pun terkeliru dengan pandangan berkenaan ketidakwujudan golongan "minority owner".

Mungkin dari segi prinsip Umar cuba menekankan bahawa kesan modal yang diberikan oleh "minority owner" se olah peminjaman wang kepada "majority owner" kerana "majority owner" mempunyai kuasa mutlak dalam sesebuah syarikat.

Segala keputusan yang dibuat memerlukan undi dan sokongan majoriti. Pihak minoriti tidak ada kuasa untuk menukar keputusan majoriti. Oleh itu modal yang dimasukkan oleh "minority owner" serupa dengan pinjaman wang. Cuma tunggu dan mengaharapkan dividen saja. Selain itu, tak ada peranan atau kuasa.