Nanea and Yves Smith — Private Equity: A Government Sponsored Enterprise

This is the first in a series of postings on the private equity industry (“PE”) and will serve as an introduction to private equity investing.

Private equity practitioners, including most famously Mitt Romney, often depict their sector as the epitome of private enterprise. These claims are false. Private equity firms not only depend directly and substantially on government support, they have also actively cultivated links to the state.

Some readers may know that private equity relies heavily on tax subsidies. Private equity firms engage in debt-leveraged buyouts of public and private companies, and the interest charges on this debt are tax deductible. But most members of the public do not know that close to half the investment capital in private equity funds is contributed directly by government entities. In this respect, private equity is little different than companies like Fannie, Freddie, and Solyndra that are regularly criticized in the media as recipients of government subsidies.

Their decisions to invest government funds in private equity reflect assumptions by government officials that have gone unchallenged and, we contend, are quite likely incorrect. Moreover, virtually all of the important details of the private equity investmentsmade by these state investors are kept secret at the insistence of PE firms, in striking contrast to every other type of government contract.

Naked Capitalism
Private Equity: A Government Sponsored Enterprise
Nanea, a private equity insider, and Yves Smith