Realist, not conformist analysis of the latest financial, business and political news

Catalyst Capital – Oh, How Short Term Private Equity Is

We all know, because we’re told so all the time, that capitalism is just so short term, markets won’t support long term investment, therefore government must be doing this. True, the actual argument about which form of capitalism is short term changes. It used to be that public companies would be better, because private companies were only interested in enriching the family shareholders, while the public companies gained much more oversight. In more recent years we’ve been told that public companies are short term because investors just care about the next earnings announcements. Thus private companies are better.

In very recent months I’ve seen that argument switching again, private equity investment is short term because they’re only interested in extracting fees rather than running the company for the long term.

A useful guide to someone spouting bulls**t is when the question keeps changing but the answer remains the same. For most of the people doing this sort of complaining more government is always the answer.

Still, let us consider how short term private equity is going to be:

Failure to cash out can put additional pressure on Catalyst as funds approach the end of their lifespan, typically eight or 10 years, by which time all money – principal and profits – is expected to be returned to investors. Catalyst Fund Limited Partnership II, for example, was supposed to mature in April 2014 after starting to invest in 2006. But Catalyst has extended the deadline at least three times.

Eh? What’s that? A decade long investment horizon? Making private equity the longest holding investors out there by a long shot.

Catalyst investors – generally locked in for the duration of a fund’s lifespan – include endowments for the University of Michigan, McGill University and the University of Toronto, public-employee pension funds in Montana and New Jersey, and major philanthropies such as the Rockefeller Foundation.

The investors just cannot get out?

Hmm. So, it would seem that private equity – and these arrangements are entirely normal for this sector – is rather longer term than most of the rest of the capitalist apparatus.

Which still means that government could be even longer term but then in our own dear Britain that’s not going to be the case, is it? We have to have elections every five years and as we know no politician does ever look beyond the next election. So it would seem that private equity is that investor with the longest time horizon. Thus I fully expect the likes of Willy Hutton, who so decries short term investors, to be backing private equity.

Yes, and there goes that porcine flying machine….

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ian parkinson
ian parkinson
6 years ago

…and almost all of the pay is tied to the final money returned to investors – after paying them a hurdle rate.

…and whilst buy cheap is nice, in practice these days industry is very focused on finding businesses where you can invest large amounts of extra capital and grow as that is the only way to make any real money

6 years ago

In America, it’s every two years (with the federal House of Representatives and most of state government) and politicians obviously see nothing beyond next November. You can find anecdotes of executives who want to milk the cash out of a subsidiary and then lay off all the workers and sell the physical plant at auction – you can find anecdotes of schoolyard shootings – but the normal case is that a going business is more valuable than a collection of spare parts (though a really bad President can temporarily make this false) and virtually all management acts to maximize value.… Read more »

Bloke in North Dorset
Bloke in North Dorset
6 years ago

I’m prepared to accept that a 3 month earnings call might be too often and maybe 4 or 6 months might be better, but those who complain are still missing the point of them: they are not a way of maximising returns but checking that a company is delivering its business plans. We all know that plans don’t survive the first punch in the mouth but they are a way of preparing for battle and adjusting too circumstances in real time. Most businesses have 10 year plans, which we all know are fantasy, but the important bit is the next… Read more »

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