And you're the patsy

Roger Montgomery ("Flash" in an earlier incarnation) gives away part of the privateer's trick in the private equity alchemy trick, in this article in the SMH by Simon Doyle:

Buy low, sell high to a patsy: that's private equity

It might seem that private equity investors have discovered a secret that public equity managers haven't worked out.

Otherwise, how could private equity funds apparently afford to pay such high prices for the assets they buy?

"For all its apparent sophistication and claimed brilliance, all that is required to generate high returns are low interest rates, lots of gearing, some modest improvements in the business's performance and a patsy in the room," say Clime Asset Management directors Roger Montgomery and John Abernethy.

In a note to Clime investors, Montgomery and Abernethy say that "ultimately, one cannot escape the basic law of investing: the higher the price paid, the lower the return received". "And in this game of musical chairs the final purchaser pays the highest price," they say.

"For what it is worth, a word of warning: Many, if not most of these deals are reliant on you and I being willing to buy these businesses back in the future at a significantly higher price [but] with less significantly improved economics."

So who is this nincompoop of a patsy who pays the highest price?

Why, it's you. Baby, it's you.

It's a compulsory payment you make through your compulsory super contributions, your pension plans, your mutual funds. Because, whilst you mind find the notion a bit rich, funds managers find all sorts of ways to justify buying this jumped up gem when it goes back on the market in the lastest "must have" IPO.

You're the patsy.

On behalf of the private equity team, let me say "thanks".

Because those buggers won't.

See: LBOs are to corporate balance sheets as fast foods are to slim bodies