The SEC and Private Equity

(2 pm. – promoted by ek hornbeck)

Cross posted from The Stars Hollow Gazette

Naked capitalism‘s Yves Smith appeared in RT news Boom/Bust to discuss the risky business and abuses of private equity in the real estate rental market. Her segment starts at 3:45.

In her article, Yves also noted this piece from an article on private equity from Friday’s Bloomberg News:

PE Slump

Private-equity transactions overall have fallen 22 percent to $53 billion through April, data compiled by Bloomberg show, led by the drop in buyouts of public companies. The value of those leveraged buyouts declined to $3.2 billion compared with an average of $34 billion in the 10 years through 2013.

The peak for buyouts came before the financial crisis, when U.S. funds struck $659 billion of deals from 2005 through 2007, including the purchases of HCA Inc., Hilton Worldwide Inc. and Biomet Inc., the data show. Buying inexpensive public companies was generally easier for the funds than carve-outs are, said Raymond Lin, a mergers and acquisitions attorney at Latham & Watkins LLP.

“The easy days for private-equity buyers are over when they profited from buying undervalued companies,” he said. “Carve-out deals require a lot of up-front work that would incur additional costs and could affect returns.”

The Standard & Poor’s 500 Index, which reached a record this week, trades at 17.4 times reported profit, the highest level since 2010, according to data compiled by Bloomberg.

PE’s Limits

While high valuations haven’t scared off dealmaking between companies, buyout firms are motivated by different factors, said Gordon Caplan, chairman of the private-equity practice group at law firm Willkie Farr & Gallagher LLP.

“If business growth slows, companies have to buy things,” he said. “Private-equity buyers can’t create synergies like company mergers can in most cases.”

Corporations are more willing to spin off divisions as management continues to clean up underperforming businesses and pay down debt following the financial crisis, said Tom Franco, a partner at Clayton Dubilier.

SEC Official Describes Widespread Lawbreaking and Material Weakness in Controls in Private Equity Industry

Posted on May 8, 2014 by Yves Smith

At a private equity conference this week, Drew Bowden, a senior SEC official, told private equity fund managers and their investors in considerable detail about how the agency had found widespread stealing and other serious infractions in its audits of private equity firms.

In the years that I’ve been reading speeches from regulators, I’ve never seen anything remotely like Bowden’s talk. I’ve embedded it at the end of this post and strongly encourage you to read it in full.

Despite the at times disconcertingly polite tone, the SEC has now announced that more than 50 percent of private equity firms it has audited have engaged in serious infractions of securities laws. These abuses were detected thanks to to Dodd Frank. Private equity general partners had been unregulated until early 2012, when they were required to SEC regulation as investment advisers. [..]

Bowden pointed out that private equity is unique among the investment advisers the SEC supervises. The general partners’ control of portfolio companies gives them access to their cash flows, which the GPs can divert into their own pockets in numerous ways. Naked Capitalism readers may recognize that this arrangement is similar to the position mortgage servicers are in: they control the relationship with the funds source, and they are also responsible for records-keeping and remitting money to investors. And as we’ve chronicled at considerable length, servicers have shown remarkable creativity in lining their wallets and investors have been unable to discipline them. [..]

Needless to say, this overly cozy arrangement has proven to be a ripe breeding ground for illegal conduct.

1 comment

    • TMC on May 22, 2014 at 1:53 am
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