Will Pension Funds Shun Private Equity?

When President Obama unveiled his budget last Wednesday, it rekindled a debate over taxation of the private equity industry. Many executives in the private equity business (as well as the venture capital and hedge fund businesses) pay the capital gains rate on their earnings rather than the higher rate paid on ordinary income. Even though these industries make most of their money from the appreciation of assets — the definition of “capital gains” — the President, and many others, believe it is unfair that employees of these funds are able to pay the capital gains rate.

The private equity industry's capacity for leveraged buyouts continues to decline. Here are some reasons for this trend: Monetizations of portfolio companies have been talking longer in recent years. That traps investors' capital, reducing capacity for redeployment in new funds or in some cases for recycling in existing funds.

As many of 708 private equity firms are facing a brutal deadline — attract investors over the next few years or face fee reductions, Bloomberg reports.

By James Kwak Recently, a lot of the political debate has been about whether private equity—and by extension Mitt Romney—is good or bad. The argument on one side is that private equity firms are vultures who destroy firms to make money; on the other, that private equity is just capitalism at work, creates value, and creates jobs.

With the world’s largest miners flocking to sell assets, cost cuts across the industry and a virtual drought in buyers, private equity funds may finally be tempted into a sector long seen as potentially lucrative but risky. Industry veterans say the coming months will be a test of whether private equity funds can turn intentions into investments and become more than niche players in an industry that has traditionally relied on public markets for cash.

A decade on, Montreal-based Cordiant Capital continues to attract capital for its focused investment mandate of investing in emerging market debt. The firm — started by David Creighton and the late Carl Otto in 1999 and whose motto is “Investors in a developing world” — has just celebrated the first closing of its fourth fund with US$250-million in the kitty. It will have a second closing at some future date. Non-Canadian institutional investors provided more than half of the US$250-million in contributions.

Kid Dynamite submits: I've been saying for a while now that if we want to reduce the risk of future crisis, the key is to reduce the leverage in the financial system. The State of Wisconsin, however, clearly didn't get the memo.

One of the mildly surprising things about the Stuyvesant Town debacle is the kinds of investors the deal attracted.  What were entities like CalPers and the Church of England doing plowing their money in along with real estate moguls like Tishman Speyer?The answer is "looking for alpha".  Underfunded pension funds have been looking for extra return in order to make up the holes . . . and the problem is worst among public pension funds, because until recently, their accounting wasn't very good, so politicians were fond of making unfunded promises in lieu of wages.