The Myth of Private Equity: An Inside Look at Wall Street’s Transformative Investments

by Jeffrey Hooke

Once an obscure niche of the investment world, private equity has grown into a juggernaut, with consequences for a wide range of industries as well as the financial markets. Private equity funds control companies that represent trillions of dollars in assets, millions of employees, and the well-being of thousands of institutional investors and their beneficiaries. Even as the ruthlessness of some funds has made private equity a poster child for the harms of unfettered capitalism, many aspects of the industry remain opaque, hidden from the normal bounds of accountability.The Myth of Private Equity is a hard-hitting and meticulous exposé from an insider’s viewpoint. Jeffrey C. Hooke—a former private equity executive and investment banker with deep knowledge of the industry—examines the negative effects of private equity and the ways in which it has avoided scrutiny. He unravels the exaggerations that the industry has spun to its customers and the business media, scrutinizing its claims of lucrative investment returns and financial wizardry and showing the stark realities that are concealed by the funds’ self-mythologizing and penchant for secrecy. Hooke details the flaws in private equity’s investment strategies, critically examines its day-to-day operations, and reveals the broad spectrum of its enablers. A bracing and essential read for both the financial profession and the broader public, this book pulls back the curtain on one of the most controversial areas of finance.

Genres: Finance, Economics, Nonfiction, Business

242 pages, Kindle Edition

Published October 5, 2021

Reviews

[Andrew Breza · Rating 5 out of 5]

Jeffrey Hooke has previously written two books: M&A: A Practical Guide to Doing the Deal and Security Analysis and Business Valuation on Wall Street. I was surprised to see his latest book, titled The Myth of Private Equity. One of these things is not like the other. When it comes to the machinations of high finance, Hooke is an insider's insider. So what does he have against private equity (PE)?

Hooke provides a history of the leveraged buyout industry, from the exceptional results it delivered decades ago to the disappointing returns, illiquidity, and financial shenanigans that characterize many PE funds today. What happened to this promising form of investment? It seems that PE became a victim of its own popularity. Early investor groups could find companies that were poorly managed, buy them at a discount, improve operations, and sell for a tidy profit. In 2021, there are so many firms trying to do that that there isn't easy money to be had anymore. Even proponents of PE acknowledge that the old ways no longer work. For example, here's a quote from the HBR article "Private Equity's Mid-life Crisis":

There’s trouble on the horizon for private equity. As the 50-year-old industry matures, investment returns are falling. In fact, for the past three decades, average buyout performance — the return a buyout firm generates from buying, improving, and then selling a company — has been on a downward trend.

It can be hard for investors to understand what their returns are from their investments. Compared to a stock-heavy portfolio, which lets investors check the value of their investments and sell shares at any time, PE fund performance is often opaque, and investors wishing to sell their stakes have to offer discounts. Hooke argues that some funds intentionally misrepresent aspects of their funds in ways that would not be allowed for public companies.

Overall, The Myth of Private Equity is a meticulously researched polemic that exposes the worst aspects of a poorly understood sector of the economy. I recommend it to policymakers, anyone involved in intuitional investing, and MBA students who want to read the minority report of high finance. I received a free copy of this book through NetGalley in exchange for an honest review.

[Adriyana Grotseva · Rating 4 out of 5]

The book provides an insight into the world of private equity (PE), exposing its self-serving interests and high fees (even when it is not performing). It is written in a bit more advanced language. For me it is lacking a bit of numbers, backed by research, for its claims. Also I wish it provided less polarized view and to give a bit more insight from the PE side too. It is interesting read for anyone to know how their pension or uni funds are managed (viewed for USA) and request from those a better management. The main insights for me from the book are:

The PE (private equity) industry is mostly comprised of 3 sectors: leveraged buyouts, growth capital and venture capital. Leveraged buyouts (LBO) in it a PE fund acquires all the common stock of an entire company (represent 65% of the PE business). A fund specializing in growth capital makes minority equity investments in reasonably mature companies. These companies need money to expand but they are not ready to complete IPO to raise capital so they choose the private route. A venture capital (VC) refers to an equity investment in a young company (but advanced beyond the startup phase). Other alternative investments: LBOs, growth capital and VC are non-conventional, alternative investments - they are not publicly traded stocks or bonds. Other popular alternative categories are hedge funds, real estate funds and physical commodity funds. A hedge fund pulls capital from institutions and wealthy individuals, however primarily invests in publicly traded securities and related derivative instruments such as options, swaps, and futures. Few of their commitments are to privately held companies. The hedge derives from the strategy of original hedge funds, which employed long/short equity model: the fund buys a certain number of common stocks that it thinks will increase in price and at the same time it shorts stocks that it thinks will fall in price. With this combination the fund is immunized from a stock market crash though it limits upside gain, hence the investors hedge their bets. If they place them properly, they will make money in both up and down markets, Wall-street calls this stance a market neutral. Private real estate investing - it has the fame as stock market crash resistant because of the contractual nature of rental payments. But it has cyclical component and the asset class is not a panacea for stock market volatility because it can collapse in a recession. Commodity funds - some investments are set up to take possession of physical commodities such as gold, oil, timber. Investors opt for these funds to get the perceived benefits of diversification, inflation protection and contrast stock market returns. An institutional investor is a large entity with ample cash to place in a group of assets, which the group administers in a professional manner (pension funds, mutual funds, sovereign wealth funds, foundations, uni endowments, insurance companies, PE and hedge funds).
Leveraged buyout (LBO) 3 categories: classic LBO (buy maximum assets with most debt borrowed (leveraged) and the least amount of equity cash invested by the buyout fund manager), the breakup LBO (high debt level but the company is not expected to repay debt solely from operations, selling parts of the business is necessary to pay down loans), the strategic LBO (LBO fund buys a moderate sized company and then expands its business by grafting on to multiple smaller competitors, the larger company then becomes an attractive acquisition target or IPO candidate). The LBO business has 6 phases (from fund manager perspective):
1. Fund formation - raising money.
2. Searching for companies to buy.
3. Valuing the deals.
4. Holding investments and trying to improve them.
5. Finding the right time to sell.
6. Starting a new fund - raising money again.
This book makes buyout funds synonymous with private equity.
There are 3 fee classifications in the PE industry: annual fixed fee (standard is 2% of the committed capital not actual assets under management), performance (carried interest) fee (standard is 20% of the profits more than a 8% internal RoR, combined with the fixed fee, this arrangement is called 2/20/8 structure), and monitoring (for manager supervising corporate activities and providing strategic guidance), director (for serving as a board member) and transaction fees (for assistance and raising financing, closing and add-on acquisitions).

[Somit · Rating 4 out of 5]

Private Equity, the world of investments, startups and its subsequent impact on the world is not hidden. While one tends to agree with its appeal, caution and due diligence in many cases seem to be taking a back seat.

The Myth of Private Equity: An Inside Look at Wall Street’s Transformative Investments, a book by Jeffrey Hooke (Senior lecturer in finance at Johns Hopkins Carey Business School), is a reiteration of those thoughts and some.

My key learning from the book, which is so true for life in general was:

"Charisma drives intrigue and Simplicity doesn't quite cut it"

The above statement is the reason why few of us make mistakes. Please note I am not trying to disregard charisma and its importance, but I am trying to throw light on how charisma can overshadow important things.

#learning #selfdevelopment

[Nelson Cover · Rating 5 out of 5]

A methodical, well organized and highly readable take down of the private equity business.

Carefully marshalling his case and his facts Hooke demonstrates from all facets of private equity enterprise its inefficiency and waste and the "going along" mentality as well as obfuscation and self-dealing present in the industry that allows it to continue to flourish while other means of investing are more efficient and cost effective.

[Gurudatt Rao · Rating 5 out of 5]

An insight into the world of private equity that is at best self serving, opaque and less prone to oversight or investigation considering their heft & reach. The book shares objective queries as to why investors should loose their hard-earned money in management fees, etc. when stock market listed instruments beat PE funds by a huge margin. A thought provoking book for startup founders, MBA grads, pension seekers and people in position of authority.

[Jim Ecock · Rating 4 out of 5]

I enjoyed the book. While not unexpected, I was still surprised how poor PE returns are and how high the fees are. There's no reason, except for cronyism, for institutional investors to use private equity in their portfolios. What I was also hoping to see from this book was a study of the damage PE causes to the
companies and their employees. It would be good to see how many companies that can be considered improved after a buyout.

[Sandeep · Rating 4 out of 5]

Solid critical (but not super critical) summary of PE. Easy to read too. The chapter on the “enablers”—mapping all the relevant actors/institutions that could do something about PE but generally don’t—and customers, ie, the various institutional investors, were interesting.

[Christopher Obert · Rating 5 out of 5]

Every American needs to read this book!

[Amy Qin · Rating 4 out of 5]

tldr the private equity industry is a fraud. an almost textbook primer on how and why the industry works (er, doesn’t) that was helpful context for me!

[Subjuntivo Subjuntivo · Rating 3 out of 5]

Explicitly shows what one can be sure happens.
Unless, of course, you are uber naive.

[Daanish Shabbir]

argument is a bit incomplete, but it was a helpful distraction while trying to make a modelll. hooke is a decent voice, and there should be more ex-finance people doing critical finance studies!!!