"As the tools of finance become more sophisticated, the obligation to regulate them wisely increases exponentially." So says Harch Capital Management chief Michael Lewitt in his most recent HCM Market Letter. He compares the financial meltdown to the Holocaust and sets his aim on Iran's nuclear capabilities, an overvalued stock market and ex post facto attempts by ratings agengies to correct their prior mistakes. His most intense vitriol is reserved for private equity firms.
Here's an excerpt from Lewitt's October 1 letter. The full text is available by subscription at hcmmarketletter.com.
Large buyout firms are reportedly preparing to roll out their next round of large funds in the next year or two. Those large institutional investors who have tied up tens of billions of dollars in these funds would do themselves and their beneficiaries a huge amount of good if they would seriously examine the returns they have received from private equity on a risk-adjusted basis, which would involve adjusting these returns for liquidity (or lack thereof) and leverage. They would also do well to consider whether their private equity investments make sense for their beneficiaries and society as a whole in terms of whether they are promoting investment in the economy. Investing in buyout firms that merely flip companies among themselves, or load companies with debt without improving their operations or helping them create new products, is hardly conducive to improving the economy.
There is a movement afoot by a number of states, including our home state of Florida, to prevent public funds from investing in companies that directly or indirectly support terrorist states such as Iran and the Sudan. HCM would suggest that such socially responsible investing should be extended to direct capital away from speculative endeavors such as private equity and toward activities that contribute to the productive capacity of the economy. The more money that is poured into private equity, the less money that is available to finance other activities that do more than simply substitute debt for equity on the balance sheets of America's corporations. The love affair with private equity has not only produced disappointing returns, but it has had an incalculable (but enormous) opportunity cost on American society and its economy whose pricewill be born for generations to come.
Some previous AR coverage of Lewitt: