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A New Low: The New York Times’ Children’s Bedtime Story of Private Equity
The style of presentation, the at best mildly concerned tone, the inaccuracies and understatements, and the thinness of information were worse than a whitewash or conventional agnotology. The story came off as an arch promotional piece for private equity, with a few necessary ugly disclosures worked in, as if the reporters had been pwned. As a lawyer who has written extensively on private equity said, “Did David Rubenstein [of Carlyle Group] write this?”
Let’s say that, like most Americans, you drive to work.
These roads, bridges and highways are increasingly maintained by Wall Street investors. They either own the road, or manage it on the government’s behalf.
Isn’t this just swell? Nowhere does it describe, as we have, that toll road projects are almost always construction projects, and the process is so flawed that they have, without exception, resulted in bankruptcies? And worse, that when these roads are built as essential infrastructure (replacing existing roads or to serve rapidly growing suburbs or exurbs), the communities served by them are left with a mess, since the roads are typically maintenance-starved before they go belly up?
The Story Omits and Minimizes Negative Information. Whitewash is too kind a word. Let’s start with the opening text:
You wake up thirsty. [Mind you, that is a single slide]
A few years ago, that glass of water might have come from your local government. Today, it could be courtesy of a private equity firm.
It may taste the same, but there’s a good chance your bill has gone up.
This leaves readers with close to nothing. How many local municipal water works have been bought by infrastructure funds (which are treated by investors not as “private equity” but as “infrastructure” funds, with risk and expected returns that are distinct from private equity, revealing lazy, sloppy reporting)? Are there any estimates of what proportion of water supply nationwide is now under corporate control? Is this trend growing or has it fallen off with the bad press infrastructure plays have gotten recent years? And how much have prices gone up?
With only a vague threat mentioned and no supporting details, this winds up being the reverse of an alarm. It numbs the reader to accept the incursion of investors as a given, and probably benign, since he never knew about it before and the Times gives him no reason to be particularly bothered.
it therefore blandly treats turning critical public services over to profiteers as perfectly reasonable. In fact, as we wrote in 2013:http://www.nakedcapitalism.com/2016/...te-equity.html
As we’ve discussed at length earlier, these schemes are simply exercises in extraction. Investors in mature infrastructure deals expect 15% to 20% returns on their investment. And that also includes the payment of all the (considerable) fees and costs of putting these transactions together. The result is tantamount to selling the family china and then renting it back in order to eat. There is no way that adding unnecessary middlemen with high return expectations improves the results to the public. In fact, the evidence is overwhelmingly the reverse: investors jack up usage fees and skimp on maintenance. And their deals are full of sneaky features to guarantee their returns.
The next slide is inaccurate:
These investors have lots of money at their disposal, mainly from rich individuals and pension funds. They also face fewer regulations than banks. Since the 2008 financial crisis, they’ve expanded their horizons and begun shopping for bargains in new places.
This perpetuates the canard that most of the money in private equity comes from high end retail investors, who are assumed to be big boys and able to walk on the wild side, when that’s demonstrably false and again shows obviously deficient reporting. The biggest single investor group in private equity is government investors, meaning public pension funds like CalPERS. Historically, the next biggest group has been private pension funds, but recent news stories suggest that sovereign wealth funds may have surpassed private pension funds.
You “might” be in a town where private equity has take over these services. If so, you’ll “likely” be charged. But is the tab “likely” to be serious? You’ve got no idea. As we wrote:
Another factor impeding dealing with these articles crisply isn’t that they are wrongheaded, but that they are flabby and inconclusive. They are reminiscent of a McKinsey progress review where the team got a ton of data but didn’t figure out the “so what’s” so they instead dumped a ton of slides in a semi-organized manner on the client to show they had done a lot of digging and initial analysis. You might call this the “Here is a lot of , I am sure you can find a pony” school of journalism.
The worst of this is that the fact that the Times appears to regard these pieces as impressive (among other things, they created custom graphics for each, as well as giving them lots of real estate) when the basic issues are all old news.
Yes, private equity regularly crapifies their offerings through via overly-aggressive cost-cutting and installing know-nothing managers.
Yes, alternative investors have been providing public services via infrastructure deals and other types of outsourcing, and their business model virtually requires that they provide a lower level of service at a higher cost to citizens. And yes, they regularly bankrupt companies.
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