Private Equity: Parting the Veil

A notoriously secretive industry is facing pressure to open up.

A few years ago, the financial pages were full of stories about companies buying one another. They still are, even though big intra-industry mergers are currently rare. Today’s purchasers have half-familiar names such as Blackstone, Carlyle or Newbridge: these are all private-equity firms, which buy businesses, both new and mature, with a view to sprucing them up and eventually selling them again. This week, for instance, Blackstone agreed to pay €3.1 billion ($3.8 billion) for Celanese, a German chemicals firm. The deal is the biggest involving a listed German company withdrawing from the stock exchange and going private.

Since 1980, estimates Venture Economics, a research firm, more than $1 trillion has been poured into private-equity funds. Once the industry was clubby and opaque, the preserve of rich families and private endowments. To some it looks sinister, especially when private-equity firms have former politicians on their boards, presumably for their connections.

In any case, these firms are facing growing pressure to be more open, and not just from conspiracy theorists. The main reason for this is the private-equity industry’s own success. As it has grown, it has attracted a broader range of institutional investors, notably big public pension funds, lured by the prospect of decent profits not correlated with volatile stockmarket returns. Venture Economics reckons that pension-fund money accounts for two-thirds of current inflows. These institutions are themselves under growing pressure to reveal more information, and they need to know what their private-equity stakes are worth.

Awkward Questions

When the technology bubble burst, pension funds were left with worthless stakes in private-equity deals that had gone sour, on top of the damage done by tumbling stockmarkets. Trade unions and other groups of employees have since been calling for more information from pension-fund managers about how workers’ money is faring. Those representing public employees (and inquisitive journalists) have been helped by state laws on the freedom of information.

In October, the University of California became the latest pension-fund investor, after state pension funds in California, Texas and elsewhere, to bow to legal pressure to release private-equity returns. It is still fighting to keep comments made during investment meetings out of the public domain. Some private-equity firms are hitting back. Rather than see public-sector investors release information, Sequoia, a Silicon Valley group, barred the Universities of California and Michigan from its newest fund and told them to sell their stakes in other funds. Other managers are giving less information to public investors, who are subject to state-disclosure rules.

A second reason for more openness is so far theoretical rather than real: the possibility of regulatory action. Already, hedge funds, also fast-growing and largely unregulated, have caught the attention of the Securities and Exchange Commission (SEC), which released proposed rules for such funds in September. So far the SEC has stayed out of private equity. But private-equity firms receive more public pension money than hedge funds do. Arguably, they are also more secretive, because hedge funds at least buy publicly traded securities (if in complicated ways).


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