It’s easy to get riled up over the New York Times’ feature article on THL Partners takeover of storied matress firm Simmons Bedding Company. The article charts how the big bad private equity firm took over the industrious and loyal small town company, gouged it for a number of dividend re-caps and management fees and now the firm is bankrupt.
The story comes with an utterly pointless video lead about how ‘private equity is everywhere in our lives’ and some guy who went to business school’s friend bought an island recently and he works in private equity.
I am not condoning private equity firms levering up companies with 80% of debt to equity and then paying themselves more than the value of equity they put in with the purchase price by borrowing more money. It’s completely inappropriate but it also entirely misses the point: That THL was able to do it in the first point.
For THL to be able to do that, some dumb fuck had to buy the bonds to allow the dividend re-cap to happen. Where in the world was he in the story? It’s not as if private equity firms are clandestine about this. They spell out in the offerings exactly what the money will be used for.
There is a gross misplacement of blame about this whole financial mess. That it was the private equity firms, the investment banks that helped arrange transactions and the fatcat CEOs who lived large. Or even that guy from Mexico who bought 6 apartments off the plan in Vegas.
Their behavior might be obscene but if we are to avoid a repeat (highly doubtful) then it’s about time the people who handed out the money – institutional investors and pension funds on behalf of consumers (and insurance companies too) – took the brunt of responsibility. At the individual level, if your 401k or individual mutual fund investments held any of these type of investments, change them. If you don’t then those obscene actors are just acting on behalf of you.
There is a metaphor that sticks in my mind: Kids in candy stores. It’s ridiculous to expect that kids in a candy store wont want to buy candy and gorge themselves on it. But there is usually a powerful force stopping them: The Parents.
There are weak parents in the financial services industry. Investment managers (whether mutual funds or pension funds) are completely submissive to management of large companies. Independent directors who represent shareholders are the same. There are no consequences because the individual investors who appoint them do nothing. I expect them to keep doing nothing, which is why I expect we’ll be discussing exactly these type of issues in 7-9 years at the same point in the next cycle.
All the talking about reform is bullshit. The kids are still going to want candy in the end. What can change though is the parents can start saying no, or begin limiting purchases.
There is no evidence that they will mind you. There hasn’t been any shaming of Yale or Stanford or Harvard for investing large amounts in private equity (after all private equity firms are stewards of capital and just service providers, ultimately the universities own and benefit from dividend re-caps) and letting the money be invested in this way. Only they have the power to change by banning the practice. There hasn’t been any shaming of or consequences for large mutual funds who sat by and let company management get fat on the land and destroying America’s ownership culture. Or the insurance companies that invested in any bond that gave equity like returns.
These are ultimately the architects of the situation we have today. Usually architects build things by design but here you have a situation where the problems stemmed from every decision not to act, not to say no and to let the candy to be bought. Stop blaming the kids and start blaming the parents.
