Private equity wants a name change

(breakingviews.com) -- Should private equity get a new name? Carlyle's David Rubenstein reckons the leveraged buyout business should rename itself "change capital" or "value-added equity."

He has a point. Some private equity firms and funds are public themselves, and U.S. regulators may step up the public disclosures required from buyout firms. So "private equity" isn't the best description of the industry any more. But other possible names may be closer to reality than Rubenstein's suggestions.

"Underwater equity," for instance. The historical record of the private equity business is pretty good. The better firms have delivered high returns for pension funds, college endowments and other investors.

But with private equity's secret sauce, high leverage, now out of the picture, the valuations of the holdings in their funds have fallen. Some companies are worth less than what is owed to creditors -- several mega-buyouts may be in this position, including Harrah's and Clear Channel. That means equity investments in these companies are underwater too -- and may remain so for quite some time.

Or how about "fee-squared capital?" Private equity firms may make money investors, but not before raking off plenty themselves. Rubenstein, for instance, was recently ranked at number 123 on the Forbes 400 list of the richest Americans.

Most money in private equity is made by charging annual management fees of 1.5% or so and then taking 20% of any profits. But private equity firms collect additional fees when they buy companies, while they own companies, and again when they sell companies -- whether or not investors make money.

Or just maybe "Pupa equity." It sounds like something leading to a transformation. But it stands for "private until public again." Buyout firms like to tout the value of taking a company off the public market.

Sometimes it can be easier to make messy decisions -- like firing staff or changing top management -- when a company isn't in the public eye. But to make any money, private equity firms need to sell their holdings for a profit. Sometimes that involves suddenly deciding the public market would be best again for the company concerned.

Blackstone (BX), for instance, has told investors it plans to float a clutch of companies now that stock markets have improved, including Team Health and Merlin Entertainments. But the buyout barons don't always leave much on the table for new public shareholders -- and sometimes the companies concerned carry more debt than heir peers, making them less resilient to downturns.

Rubenstein thinks the private equity industry is due a transformation. But maybe it needs to go back to its roots and haul itself up by the bootstraps.