Reuters
Blackstone CEO Steve Schwarzman.
- Private-equity firms are facing a deal environment that, while challenging in their pursuit of returns, might just help stave off scrutiny of the industry. PE has been blasted with criticism from celebrities like Taylor Swift and Democratic presidential candidate Elizabeth Warren.
- 2019 marked the year private equity became a punching bag on late-night talk show shows and the Twitter feeds of some politicians who said the industry profits from US businesses at the expense of laid-off workers.
- Firms have said they can add value to companies. But a new report from PitchBook indicates PE firms will likely have to change their ways regardless in light of a tougher deal market.
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Private-equity firms are facing a deal environment that, while challenging in their pursuit of returns, might just help stave off scrutiny of how they make money.
The industry has attracted criticism from celebrities including Taylor Swift as well as Democratic presidential candidate Elizabeth Warren.
2019 marked the year private equity became a punching bag on late-night talk show shows and the Twitter feeds of some politicians who said the industry profits from US businesses at the expense of laid-off workers.
PE firms have said they can add value to companies. But a new report from PitchBook indicates they will likely have to change their ways regardless in light of a tougher deal market.
PE firms are looking to improve operations
The report says PE firms have had to get creative with how they deploy capital, as investors increasingly pour money into the private markets in a search for yield after years of ultra-low interest rates.
Opportunities are difficult to find and prices are rising for the best investments as multiple PE firms bid for companies.
This has meant that PE firms are, in many cases, engaging in investments that eschew the traditional private-equity takeover: instead of buying a whole company with a large debt load, they are settling for minority stakes and trying to improve operations.
"Improving IT, marketing, the supply chain and more has allowed operations, rather than financial engineering, to drive a mounting portion of PE returns," said the PitchBook report.
"Not only do these strategies help PE firms propel returns ... they also address persistent public and political criticism."
Public relations battle heats up
With the 2020 presidential race heating up in the coming months, private equity is expected to remain under the crosshairs of politicians, with candidate Elizabeth Warren calling out private equity as a vivid illustration of how she says Wall Street needs reform.
Specifically, Warren has criticized the management fees private-equity firms charge their portfolio companies, likening them to vampires that suck the life out of companies.
Adding fuel to the fire, country music star Taylor Swift has railed on private equity's influence in the music business after talent manager Scooter Braun bought the rights to her music in a deal supported by private equity firm The Carlyle Group.
In a speech at the Billboard Women in Music event this month, Swift called PE "a potentially harmful force" to musicians and said firms were "buying up our music as if it is real estate."
Private equity, meanwhile, has commissioned their own lobbyists and public relations specialists in Washington to pull up research that illustrates how PE has actually helped the American economy.
The PitchBook report pointed to a third-quarter earnings call in which Blackstone CEO Stephen Schwarzman went so far as addressing some of the public criticism of the PE industry.
He said that Blackstone's portfolio companies have added more than 100,000 net jobs during its ownership over the past fifteen years.
"We are incredibly proud of what we do at Blackstone and the vital role we play in society," Schwarzman said on the call.
"For example, the very strong returns we generate, particularly in the current low interest-rate environment, enable teachers, police officers, firemen, and other public and corporate sector employees to retire with sufficient savings and secure pensions."
Blackstone, which has more than half a trillion dollars of assets under management, announced on Friday that it would hold its fourth quarter and full-year investor conference call on Jan. 30.
Some firms modify investment approach
The PitchBook report held up KKR as an example of one PE firm that has modified their investing approach in a way that focuses on operational improvements within a portfolio company.
KKR and some other firms have done this by structuring a PE deal in such a way that provides employees with ownership stakes in the company - as well as bonuses tied to performance, the report noted. In the past, these incentives were reserved exclusively for senior leadership.
PitchBook said that it sees the PE industry continuing to evolve its investment approach, especially as the public criticism of the industry ramps up in 2020.
"Continued scrutiny and backlash surrounding a lack of transparency, the fees charged to portfolio companies, ruthless tactics and asymmetric outcomes when PE firms succeed while portfolio companies fail will likely push the industry to change in some ways going forward," the report said.