Hedge fund managers?
You know the financial center of gravity has shifted when the "barbarians" of the 1980s start taking pains to distinguish themselves from an upstart swarm of buccaneers.
Now the "private equity" outfits that hostilely boarded many a corporate vessel – firms like KKR, Blackstone, Carlyle Group, and TPG — pose as stodgy. In comparison to what, you say? Those dastardly hedge funds, of course.
Dow Jones reporters Laura Kreutzer and Shasha Dai summarize the new PE line thus: "As regulators gear up to monitor private pools of capital more, private equity firms have a message they really, really want to get across: we’re not hedge funds."
PE representatives say PEs, in contrast to hedge funds:
- invest "patient capital," making them "less susceptible to short-term swings."
- lock up investors' funds for at least five years.
- put "their core focus on investing in companies, not in obscure financial instruments."
- have "historically been more careful about [their] use of leverage".
But perhaps the PEs' PR message doesn't completely wash:
In fact, during the recent boom, a number of the larger private equity firms came to resemble their hedge fund cousins rather markedly – an example of the much-vaunted convergence between the two types of managers at the time. TPG Capital LP, Apollo Management LP and Bain Capital, to name a few, have all set up credit arms that invest in debt securities – not companies. Kohlberg Kravis Roberts & Co. has a capital market division that has syndicated out some debt, and Blackstone Group simply bought a hedge fund manager, GSO Capital Partners, outright a few years ago. Some financial arms set up by the largest private equity firms have suffered heavily over the past couple of years, although these firms were careful to hive off much of the risk of these vehicles. Take Carlyle Capital Corp., a publicly listed affiliate of Carlyle that invested in mortgages. It collapsed at around the same time as Bear Stearns Cos. did last year, and for similar reasons.
So PEs have started to look more like hedge funds. Imagine Blawgletter's surprise.
Still, PEs do have a point. We know that, from January 1, 2003 through early 2008, the 50 largest PE firms raised $810 billion in direct investment capital, according to Private Equity International. How many dollars, euros, and yuan have flowed into the hedge fund maw? Nobody seems to know.
And there lies the problem. An almost complete lack of public transparency — and, with it, public accountability — characterizes the hedge fund industry. Which makes private equity firms look good but only by comparison. Yes, the center of gravity has moved but not to a better place.
We don't know the extent of the problem. "Prophylactic" regulation — the kind aiming to prevent the excesses that produce booms and busts – would help. Starting right about 18 years ago, when Congress and President Clinton did the opposite.
