Private-Equity Tycoons Look Like Geniuses

A recent news story confirms that paper-shuffling is still by far the highest-paying job in America. A Jumbo Payday for Deal Titans was last week’s big story from the smoke-and-mirrors aerie of high-finance. Nine men — there were no women in the group — at private equity firms including Apollo Global Management, Blackstone Group, KKR and Carlyle Group will bank more than $1 billion in dividends and compensation for deals they put together in 2012.

This may come as good news to, for one, realtors struggling to unload $20 million mansions in Aspen, Bal Harbour and New York City, but economists will find little reason to celebrate. For in fact, all nine of these billionaires combined did not add even a single widget to the nation’s economic output. Their relatively modest contribution was to have realized “value” for their own shareholders, chiefly in the form of rising stock prices.

The Nine are regarded as Wall Street’s very best and brightest, for sure. But it remains to be seen whether their exalted reputations will survive the next bear market. For in the investment world, as we know, genius is a rising stock market. And this bull has had plenty of help from a desperately reckless Federal Reserve. It would be no exaggeration to say that the Fed’s brand of loosening has made it much easier for the likes of Henry Kravis, Leon Black and Stephen Schwarzman to raise $10 billion for a buyout than for a small-businessman to get a $20,000 loan.

Leaving ‘Sage’ in the Dust

It’s striking that The Nine have racked up such stellar numbers at a time when the Sage of Omaha himself supposedly has been struggling to find companies worth buying. Counting the 50% stake he is about to take in H.J. Heinz, Buffett has done only one other megadeal since 2010 – the buyout of Burlington Northern Santa Fe for $26 billion in 2010. So, who’s going to be right — Buffett? Or private-equity’s super-elite, financed by wealthy clients with a manifestly insatiable appetite for risk? If you’re betting that the paper shufflers will go down in flames long before Buffett, you’re getting decent odds. That’s because most of The Nine are conspicuously — and ethically — bound to remaining heavily invested in their own companies for at least the next few years. And while this made it even easier for them to raise money, it also left them vulnerable to whatever cataclysmic financial event might be lurking. Buffett will still be selling ketchup by the box-car load at that point, but we doubt that The Nine feather merchants will turn out to have invested in anything so prosaic.

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Written By: Rick Ackerman