Disclosure Isn’t Enough: Private Equity
Blackstone and TPG are marketing new funds to institutional investors and according to Bloomberg News, both firms are disclosing much more about the fees and expenses charged to portfolio companies. According to Bloomberg:
Blackstone Group LP said it could collect as much as $20 million annually from investors and companies in its next buyout fund, for services such as health care consulting and bulk purchasing. TPG Capital put the potential charge for similar services at as much as $10 million a year for its new fund, which is currently seeking to raise as much as $10 billion.
Experts contacted by Sabrina Willmer and Alan Katz for this article see these revelations as an important development and a “new day” for private equity. Although enhanced disclosure marks an improvement, it is hardly a major victory. Until private equity begins to eliminate extra fees, nothing important will have changed.
Corporate reformers constantly tout the value of enhanced disclosure. For example, they have pushed companies to reveal more and more about the compensation, bonuses, and perks afforded senior management. The thought being that disclosure would compel or embarrass companies into reducing executive pay packages to more reasonable levels. Of course, nothing of the sort has happened. While CEOs would certainly prefer that their financial arrangements remain private, they’re perfectly happy to continue to haul in millions of dollars of cash and stock even if means enduring a couple of days of nasty newspaper articles. Although the SEC has required much greater disclosure, executive compensation continues to rise dramatically. So much for transparency.
Mutual funds have gone down the same path. The SEC has demanded all sorts of details about the fees, expenses, and risks of mutual funds. There are all sort of interesting tidbits. However, fund prospectuses have become exceedingly long, forcing the SEC to mandate a summary prospectus. Meanwhile the fees, expenses, and investment practices of mutual funds haven’t changed. So much for transparency.
The same is likely to be true for private equity. Blackstone and TPG would prefer to keep their financial arrangements private. However, if a bit of disclosure is the price for raising the next multi-billion fund, then so be it. As long as the money keeps flowing into their bank accounts, private equity executives will do whatever it takes.