Private Equity Screwing of Billionaires

As the long-term slide in private equity returns has accelerated, and the industry has (not surprisingly) resorted to chicanery to try to keep milking investors, some big players are now willing to burn their bridges and call out industry misconduct in blunt terms. The example is a Financial Times front page story, Private equity’s best days are over, says Egyptian billionaire Nassef Sawiris, where the headline is tame compared to Sawiris’ criticisms.

Oxford Business School professor Ludovic Phalippou ascertained that private equity stopped outperforming public stocks in 2006.

The fund managers, aka “general partners” had managed to so cow the investors, aka “limited partners” as to how only the privileged were admitted to the special club of fund investors, that they bought into an inversion of the normal rules in money-land: that the party with the gold, here the limited partners, makes the rules (or at least has a lot of say). Not only did these investors accept non-negotiable agreements1 with egregiously one-sided terms, but they also accepted not known how much in fees and expenses they were being charged and not having independent valuations (which is considered to be fundamental for every other type of investment made by fiduciaries). And they also agreed to treating the contracts as trade secrets, when there was nothing “trade secret” about them, and refrained from saying bad things about particular general partners or the industry generally, lest they no longer be afforded the opportunity to invest.

private equity has for decades been the largest source of fees to Wall Street and top white shoe law firms. Contacts inform me that private equity has also provided more than half the professional fees to McKinsey, Bain and BCG since the early 2000s. In its pre-crisis IPO filing, KKR stated that was the fifth biggest employer in the US via the companies it owned.

What’s the point of being wealthy if one is treated like the ordinary retail investor. eg a sheep to be shorn.

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I’ve read that some of the biggest Private Equity investors are the fancy university endowments. The ones with tens of billions invested.

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My favorite part of the agreement to look for is the statement of fees, stock issuances and hold backs.

For an opportunity I passed on more than 6 years ago, a refinery operation with permits to expand a lone location up in the Bakken was doing yet another round of financing:

$8/sh par value ← Great place to start. Who set’s par value today?
20% of investment taken by the marketing team as a fee for the transaction (stock dilution of 20%! for EVERY single new investor)
2% hold back for the investment banker who is brokering the deal

The gentleman on the phone was quite excited to share that he’d get 20% of the shares ALSO, but had NO IDEA what that actually meant. I hope they were paying him cash, too.

This company has been operating, presumably, for more than a decade, but has yet to make an actual barrel of oil.

Engineering Breakthrough - The Davis Refinery Project in North Dakota will be the World’s First Net Zero Carbon Refinery - Meridian Energy Group Inc.

Seems like the military industrial complex has nothing on these guys. They have YET to produce a single barrel of refined product, but they have identified another site for another refinery AND they have a Technology services stack which will mint even more money SAAS!

Just come along for the innovation! The green technology! The efficiency gains!

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