July 9, 2007
Private Equity's Long Term Horizon?
The Financial Times is reporting that Moody's will today issue a report taking "issue with the argument that private ownership frees companies from the short-term pressures of the equity markets, enabling them to invest and plan for the long term." The report states that:
The current environment does not suggest that private equity firms are investing over a longer-term horizon than do public companies despite not being driven by the pressure to publicly report quarterly earnings.
The report also asserts that private equity's "tendency to increase a portfolio group’s indebtedness to pay themselves large dividends runs counter to their claim of being long-term investors." And it takes issue with private equity's "claim that improvements in companies’ performance are driven by more focused management teams" rather than due to leverage and other financial engineering.
One of the keystone benefits often cited by supporters of private equity is their longer term horizon and ability to limit management agency costs to produce superior returns. Some have argued that these benefits combined with the rapid rise of private equity will result in an eclipse of the public corporation. While this report will give these supporters pause, the jury is still out and more study is needed in this area to truly understand whether the private equity model is indeed superior to the public one, as well as its benefits.
And on a related note, the FT also publishes today the results of a White & Case survey of finance professionals which found that 60 percent of respondents believe that "[t]he European leveraged finance market is an unsustainable bubble."
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