Warren Buffett Private Equity
Warren Buffett Private Equity
Warren Buffett’s Dislike for Private Equity
Warren Buffett is widely recognized for his ability to invest and amass huge piles of wealth–despite the recession he is the #2 wealthiest person in the world. Mr. Buffet has a very public distaste for the private equity industry. This may surprise those of you familiar with Mr. Buffett’s holdings considering he has a stake in Goldman Sachs which has a private equity division, Goldman Sachs Capital Partners. Apparently, his $5 billion investment in Goldman Sachs has not changed his perception of the industry.
In a letter to shareholders he gave a lengthy criticism of private equity. His primary complaint is that leveraged buyout funds buy and sell companies with a sole focus on profiting from the exit. Comparing the LBO approach to Berkshire Hathaway’s, he says “We have a decided advantage, therefore, when we encounter sellers who truly care about the future of their businesses.” While Berkshire may take a different approach, buyout firms do have a stake in the success of their portfolio companies and if the companies tank following the IPO or sale that reflects poorly on the buyout firm.
Mr. Buffett derides the use of leverage by private equity firms and explains that the LBO model is still in use despite a shift toward calling themselves private equity firms more than “leveraged buyout operators.”
Some years back our competitors were known as “leveraged-buyout operators.” But LBO became a bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage.Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private-equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private.
It seems to me that his essential complaint is with the fundamental idea of a leveraged buyout and it is a bit unreasonable to expect that a historically successful business model would be abandoned over some adverse publicity. Although his thoughts are apparently resonating with private equity firms who are said to be turning away from leverage toward more equity. He seems to see a major disconnect between the private equity backer and the portfolio company, as if the private equity firm is saving itself by refusing to inject equity into their investments but what does it benefit the private equity firm?
I wonder what his motivation for criticizing private equity firms. In his page-long critique he contrasts buyout firms with his own firm, Berkshire Hathaway. Not surprisingly, Berkshire Hathaway comes out sounding like a much more responsible and business-friendly option and private equity firms are depicted as careless profit- extractors.
I always listen when Warren Buffet talks because his record for predicting the market and improving businesses is unparalleled. However, his dislike for private equity continues to baffle me. If you’d like to read his annual letter to investors, follow this link.
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