Private equity: “It’s kind of like sex”

What could possibly prompt someone to compare private equity to sex? It must be because leveraged buyouts are so exciting and scandalous, right?

Actually, it’s because “there is nothing new about it” says Home Depot co-founder Kenneth Langone (pictured at left).

Although he’s a staunch proponent of private-equity deals, Langone views these lucrative ventures as little more than a way for investors to “get more juice out of a lemon” and believes we shouldn’t try to find complicated explanations for what is just “simple math.”

But for Harvard economist Michael Jensen, who debated Langone at a conference earlier this week, it’s a bit more complex. For Jensen, private equity represents a new model of corporate governance that has an advantage over that of public companies. Free from the shareholders and quarterly reports that can hold public companies hostage, privately owned companies can focus on the long term. And private-equity funds usually run businesses more efficiently than do public companies, Jensen argues. That’s because private-equity ownership that under-performs can easily be kicked to the curb, whereas “shareholders of a public company can be stuck for years with inefficient management and poor performance.” 

Why should we care about this rather arcane discussion? Because billions of dollars may be at stake. Private equity is under the spotlight these days because of recent turbulence in the credit markets and predictions that the days of multibillion-dollar private-equity deals are a thing of the past. And the U.S. Congress is taking a hard look at private-equity managers like Blackstone CEO Steve Schwarzman, who has become the poster boy for what some are calling “the new gilded age.”

So what should we make of the private-equity craze? FP recently spoke with Steve Forbes, editor in chief of Forbes magazine, to get his take. He doesn’t quite compare private equity to sex, but he does have interesting things to say. Check it out.