We have chuckled about it before, but we come back to it today because the granddaddy of private equity – Kohlberg Kravis Roberts – is preparing to sell shares to the public on the NYSE.
The idea of private equity is that a group of smart, well-financed, slick operators can get the better of the chumps in the public markets. The idea is probably right, but it makes nonsense of the whole premise of modern market theory – that the markets always know more than any individual or group of players. If the markets put a price of $100 on a stock – that’s what it is worth, no more, no less; at least, that’s the theory.
But the private equity hustlers nevertheless go into the public market, buy a company at a price set by the market, clean it up, cut it up, and then sell it back to the market at a higher price.
Supposedly, the private equity boys have “added value” by nipping and tucking on the corporate body before selling it back to the yahoos. But what do the financiers know about running a company? How is it possible that they are able to take a company out of the control of the people who know it best – founders, CEOs, managers – and improve it? And even if they were to get lucky with one, what makes these dilettantes think they can do it 160 times – which is the number of buyouts completed by KKR? We don’t recall the details, but we remember a study showing that private equity surgeons had added no net value to the companies they sliced up…and that share prices tended to sink after the initial return to the market.
And then you have to wonder about the chutzpah of it. Public shareholders were getting smacked both coming and going – once when they sold a company to KKR for too little…and again when they bought it back for too much. And now cometh KKR into the public markets to smack the poor lumpeninvestoriat again. This time, KKR says, in effect: we’re smarter than you are…but we’re going to let you buy our shares anyway. Of course, if KKR really were smarter, why would they want to cut the little guys in? If they could reliably add value and produce above-market gains they could raise all the capital they could possibly need. Of course…they can’t. And now, with the chumps wising up, it’s getting harder for private equity players to raise money.
Nor is this the first time KKR has sold shares to the public. The IHT reports:
“KKR Private Equity Investors had its debut on the Amsterdam bourse at $25 on May 3, 2006, when KKR sold 200 million shares of the unit, valuing it at $5 billion. The shares have fallen more than 57% since then, to close Friday at $10.50.”
for Markets and Money