Thursday, January 11, 2007

Dining on Salmon

It's pretty plain to Guambat's reader that Guambat often dines in the Economonitor's blog written by Felix Salmon. If you don't also you will have missed a good quote about data analysis and an absolutely bitchy (if perhaps spot on) critique of Freakonomics.

You will have also missed yet another critical analysis of private equity.

Why we should mistrust Steven Levitt
[Daniel] Davies, it turns out, isn't much of a fan of many of the techniques beloved of Steven Levitt [of Freakonomics fame and fortune], and worries about the consquences of his rock-star status:
Levitt's book is Edward de Bono for the green eyeshades set. I am wholly suspicious of this outpouring of creativity on the part of economists, rather as I would suspect and fear a sudden outbreak of interest in stochastic calculus among teachers of modern dance.

The business of coming up with a natural experiment to test some hypothesis or other is basically the same thing as looking for a piquant anecdote to illustrate a point.

...[B]ut it is a mistake to think that one is adding anything by taking the semi-attached anecdote and turning it into a regression. Or to put it another way, the plural of "anecdote" is not "data" - it's "Freakonomics".

Guambat also considered the question asked by Salmon, "Where are the defenders of private equity?" Guambat reviewed the many bits of "private equity" floating about in the Stew and couln't find any defense of it there.

Salmon didn't raise a defense of private equity, either. Instead, he produced a synopsis of a critique of private equity written by Edward Chancellor, the assistant editor at
Breaking Views in New York. And Guambat reckons its a good thing he did, because Guambat hasn't the goods to subscribe to the full report. Anyway, this is Salmon's take on Chancellor's take:
There's a very wide distribution of returns between the best and the worst managers. Unless investors have money in the best-performing buyout funds, they're likely to do far worse than average... Over the past 10 years, investors could have beaten the returns of the best private equity funds simply by applying private equity-style leverage to a portfolio of quoted mid-cap value stocks...

Many private equity deals nowadays involve buying companies from other buyout firms. These so-called "sponsor-to-sponsor deals" offer little obvious scope for operational improvement.... Private equity has come to resemble a game of hot potato in which companies are handed from one private equity firm to another, sometimes as often as three or four times in succession.... [See]

Private equity firms could clog up the world's stock markets as they prepare to float upwards of a trillion dollars worth of companies in the years to come. That may not be good news for limited partners, but the private equity firms will still harvest tens of millions of dollars in deal and management fees... [See]

There's the legacy of excessive corporate debt to consider. This could cripple hundreds of companies in years to come ... [See]

In fact, the only major financial players who stand to profit from a buyout bust are the private equity firms themselves. Senior industry figures acknowledge that corporate valuations are currently unattractive. Some admit, in private, to looking forward to a downturn, which might allow them to acquire companies at more affordable prices. Several firms, including industry titans Blackstone, Carlyle, KKR and Texas Pacific have anticipated such an outcome by raising distressed debt funds.

Today's private equity boom is shaping up to add yet another chapter to Wall Street's long history of cynicism and arrogance. [See]


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