Private equity flexes muscles, takes lumps

Private equity hogged the financial-news spotlight last week, starting with the precedent-shattering Chrysler Group deal, which saw…

Private equity hogged the financial-news spotlight last week, starting with
the precedent-shattering Chrysler Group deal, which saw New York-based Cerberus Capital Management LP buy 80% of the faltering American car company from automaker DaimlerChrysler AG of Stuttgart, Germany.
Then the Financial Times re-
ported that U.S. companies raised more money through deals involving private placements than initial public offerings last year, a milestone the paper described as a “dramatic shift among issuers and investors.”
But private equity had to take some lumps last week, as well. At a special hearing on the industry before the House Financial Services Committee, Andy Stern, president of the powerful Washington-based Service Employees International Union raised questions about private-equity practices. “If private-equity firms will not take steps to change, Congress should legislate,” he said.
Committee Chairman Barney Frank, D-Mass., agreed. “To the extent that we see gross imbalances, then we’re going to have to act,” he said.

Mover and shaker
For an investor who just bought a measly 0.3% of New York-based Citigroup Inc. stock, Eddie Lampert sure got a lot of attention last week.
Then again, Mr. Lampert, founder and chairman of the renowned Greenwich, Conn.-based hedge fund ESL Investments Inc., isn’t just any investor. The last time he made an $800 million bet on a company with a sluggish stock price, he took control of struggling retailer Kmart Corp. of Troy, Mich.
Mr. Lampert subsequently merged the company with Hoffman Estates, Ill.-based Sears Holding Corp., which now is known as much for real estate as retail. Sears stock has appreciated nearly 80% in the past two years, and Citigroup stock jumped 4% on the news of his purchase of 15.2 million shares.
Now Wall Street is waiting to see if Mr. Lampert will take steps to shake things up at Citi or work quietly behind the scenes with embattled chairman and chief executive Charles Prince and his management team.

Equal opportunity?
Expect Democratic presidential candidate John Edwards to take some political heat following the disclosure that the self-styled populist earned $479,512 last year as a part-time consultant for Fortress Investment Group LLC of New York.
To make matters worse, as a Wall Street Journal editorial pointed out, the New York-based investment firm “keeps its hedge funds in the Cayman Islands as a tax shelter for its clients.” According to a spokesman for Mr. Edwards, the former senator from North Carolina and 2004 vice presidential nominee “is running for president to give every American the opportunity that he’s had.”
His fellow candidates aren’t doing too bad, either.
Former New York Mayor Rudy Giuliani, who in June 2001 told a divorce court he had only $7,000 in assets under his control, reported $30 million in assets, much of which came from paid speeches he gave following Sept. 11, 2001. Last year alone, he made more than $11 million in paid speeches, at up to $200,000 a pop.
Leading the pack was Republican Mitt Romney. The former governor of Massachusetts and founder of
private-equity firm Bain Capital LLC of Boston, said he expects to report as much as $350 million in assets.

Risky business
As for other wealthy people, the New York-based Institute for Private Investors reported last week that 74% of its members surveyed said that the most important risk they monitor is manager risk.
Noting that the median number of money managers employed by its members is 14, and the average number employed by members with more than $200 million in assets is 31, the institute called this task “an enormous challenge for even the most diligent of investors.”