I was having coffee with my bud Ignoto on the patio outside the Palookaville Borders today, in the warm breezes and the spring sunshine.
"Three questions," I posed to Ignoto, who knows much more about this stuff than I do. "One, is it true that there was a ton of private equity investing between '03 and '07? Two, can you generalize as to what they spent it on? And three, isn't it true that they lost a bundle?"
Answers: "Yes as to one and three" (which is pretty much what I expected). "As to two--well, let me tell you how private equity makes its money. Forget about 'undervalued investment opportunities.' Forget about improved management,' blah blah. The components are: (a) easy money; and (b) nonrecourse finance. The banks were desperate to move money; the PE firms are strong enough they can insist on nonrecourse. So, leverage up on debt, say six-one, and keep what flows throw to the equity. It's that simple."
Nonrecourse. I should have though of that.
Fun fact: The annual budget of the Securities and Exchange commission is about $1.1 billion. Seven top Wall Street investment fund managers--each individually--make more than that.