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More capital has been raised on private markets than public ones for the past decade © Ingram Pinn
When
Securities and Exchange Commission chair Gary Gensler was in charge of
the Commodity Futures Trading Commission during the administration of
Barack Obama, it became known as the little regulatory agency that
could. Gensler reined in the futures and options markets in dozens of
ways, passing far more new rules and regulations than any of his peers.
When he took over the SEC roughly one year ago, I wrote
that we should expect big changes. And last week, they came, with new
rules shining much-needed light on the private markets, which have
raised more capital than public ones for the past decade. For more on
that, check out my latest column.
As
a former Goldman Sachs partner who also served in the Treasury
department during the administration of Bill Clinton, Gensler is a
powerful financial cop precisely because he’s a “born-again” regulator.
At Goldman, he worked under financial deregulator and former US Treasury
secretary Robert Rubin. He then became an under-secretary to Rubin’s
successor, Larry Summers, who passed the Commodity Futures Modernization
Act. This was the law that exempted credit default swaps, which
exploded the global economy during the financial crisis of 2008, from
regulation. Gensler carries a lot of guilt about what that team did, and
didn’t do, in the run-up to the subprime mortgage crisis. He knows
where all the bodies are buried, and is slowly but surely unearthing
them.
I
think the rise of private equity and the utter lack of regulation in
the sector until a few days ago shows how the financial crisis never
really ended — it just morphed into something new. Instead of banks
bullying customers, even big ones, it’s now the private equity shops who
have control. As Andrew Park, senior policy analyst at Americans for
Financial Reform (which has done great work on the risks of investing
with private equity, see here),
put it to me last week: “When pension funds ask for fees, and more
specific accounting standards, private equity funds laugh in their face.
Even though it’s their money, the current marketplace denies them this
basic information that they need to make allocation decisions on behalf
of retirees.”
For
more of what they aren’t telling us, as well as some of the rather BS
responses from the funds themselves, take a look at a paper entitled “An Inconvenient Fact: Private Equity Returns & The Billionaire Factory”,
by Oxford academic Ludovic Phalippou, who must be Stephen Schwarzman’s
very least favourite person. He estimates that since 2006, the majority
of private equity firms either met or underperformed the index — and
took home $370bn in carry fees for the privilege.
I’ve
done a fair bit of reporting on the effects of private equity in the
housing market and some of the asymmetries it has caused (see senator
Sherrod Brown railing about that
in the banking committee hearings last week). But I’m going to be
spending more time digging into private equity’s role in the ridiculous
default rate level on loans in the for-profit education business (which
companies like Apollo have been in, right along with our former
president) and also healthcare, which private equity firms are piling
into. I have a dermatologist friend who recently sold his practice to a
private equity firm, but couldn’t bear to stay on after because
management forced him to cut the amount of time spent with patients in
half, and focus more on scale and less on people.
Eileen
Appelbaum, who is the co-director of the Center for Economic and Policy
Research in Washington and one of the top academics looking at private
equity, noted
in recent Senate testimony that “the effects of Covid-19 and proposed
spending in President Joe Biden’s Build Back Better bill have fuelled
private equity’s already considerable interest in home healthcare,
hospice services and behavioural health — the latter to treat both
victims of the opioid crisis and those suffering mental health problems
caused by the isolation and disruption of the pandemic”.
Why does the idea of Leon Black or Stephen Schwarzman focusing on post-Covid health issues make me feel more depressed?
Is healthcare going to become the new subprime, with surprise billing,
crushing debt, and sub-par treatment? Our system is complicated and
patchy as it is. But Peter, the larger issue is what I’d like your take
on. Do you agree with folks who say that we’ve never left the great
financial crisis? With debt at record levels, and the Federal Reserve
about to raise rates significantly, where will you be looking for
financial risk? |