Anatole - your argument that the success of private equity is due to regulatory pressure on PFs is seductive but wrong. The success is due to the fact that with public companies, shareholders are dispersed, but with private companies, shareholders are concentrated. It is much easier to get consensus about necessary changes in corporate strategy in the latter case. In addition the incentive to make decisions is greater with concentrated ownership than with dispersed ownership.

John, London,

Anatole covers one of many aspect, as does Tim - to him I would just say that it would be much cheaper to hire new management rather than pay the standard 2+20 fees to a private equity firms. No one talks much about how expensive this form of management is, all the outrage is about high CEO salaries, but they pale in comparison to what the big PE firms earn their top managers. It is also much too easy to take public companies over, and often management gets in effect bribed by attractive terms of employment and cheap share options.
follow www.pro-gov.org

ProGov, London,

Great question, but a poorly constructed arguement. Yes the supply of debt feeds the market. But can you explain why those of us who actually work in this market are able to "buy cheap" in a competitive market? Not in the artcle. You might want to think about the impact of financial engineering all the way up the industry and then have another go at explaining why partners are paid so much. When thinking about performance, what about principle-agent issues?

John Gilligan, st albans,

The ni research sounded interesting, but who financed the research? Could we have a clear statement that the uni research dept isn't funded by the private equity industry?

Ah, having checked their web site: "The Centre for Management Buy-out Research (CMBOR) was founded by Barclays Private Equity Limited and Deloitte at the Nottingham University Business School in March 1986 to monitor and analyse management buy-outs in a comprehensive and objective way. "

Doesn't mean they are not independent, but it is a little dubious, or at least convenient.

Neil Murphy, cromer,

There is a simple asnwer to Anatole's question - a few people get very rich because a great deal of people are getting a fair bit richer. The public and unions are always fooled by this - look at the furore surrounding sat Jonathan Ross' £3m at the BBC. That's only a £1 a year from 3 million viewers, but it looks enormous on its own. PE creates value in a very simple way: underperforming businesses are restructured with properly incentivised management and a mnore effecient capital structure. However, the stock of underperfoming companies and good management teams is not infinite and so retruns will eventually normalise.

Tim, London,

The article is spot on.

damon buffini, london, uk

Tee-hee, well stated.

Here we see dull-witted regulation once again proven powerless to defy fundamental dynamics.

If you dump a rock in a stream, the water will find a way to flow around it. Metaphorically, the rock is regulation, private-equity is the channel around the rock, the private-equity fortunes are the froth and turbulence of the rushing water. New rocks on their way, no doubt.

The good news is that such capability exists. Without it we'd be in sclerotic risk-denial.

Long live capitalism!

John Dempster, London,

Right on the money - but the systemic rigging of world financial markets has far greater consequences than this relatively trivial
transfer of corporate ownership from broadbased shareholder-owned companies to broad-based syndicate-owned companies.

The implications of low interest rates, flat yield curves, the huge lie of valuations of discounted forward cash flows which is now intrinsic to all international accounting will have far far greater long term economic effects in my view.

Anatole - go for this please.

James Poole, retired

James Poole, London,

One reason private equity deals appear to create employment in investee companies is that those companies are often bought, with the collusion of management, just at the moment when public markets value them least but insiders can see better times ahead. It is no surprise that private equity firms offer management rich rewards for their collaboration.

Stephen Hargrave, London,

It's also, surely, that private equity have been accepting large risks by gearing up and have, so far, mostly been lucky. A lot of our pension savings are now invested in a way that is much riskier than just punting the money on equities. What pension funds really ought to do is to maintain a long-term balanced portfolio, but they generally prefer to follow the latest fad.

Frank Upton, Solihull,

More efficient capital structures do produce greater returns to equity (enhanced by the effect of tax shields) on their own.

They also have an implied effect. They force management to think about generating returns to pay the interest. Bankers keep managers honest.

Private equity houses are also more actively involved in performance managing their investments.

Traditional funds have not held the managers of the companies they invest to account. If they juggled portfolios in the short term less and scrutinised long term operational efficiency and customer focus more they would see better returns and might justify the "management" fees they charge.

Richard Boyce, HAYWARDS HEATH, UK

I enjoyed this article immensely. Certainly I found the argument regarding regulation and institutional bias incredibly insightful. However, I do not understand why private equity firms would not compete amongst themselves to the extent that target companies were no longer bought on the cheap?

Simon Potts, Calabasas, CA, USA

I love it! You have turned the light on for me and given the bigger picture. Thank you!

susan newman, West Hartford, usa

Christ, Anatole what on earth is this all about. How will this allow us ordinary geezers to make some dosh eh. . . . this is all a bit above my common ordinary head.

rod, Northallerton, UK

The key advantage of private equity is overlooked ie the tax efficiency of debt over equity, which has been exacerbated under Gordon Brown. No quoted company, no matter how cash generative, could gain shareholder approval to leverage up to the extent commonly applied in private equity deals. Levelling the playing field in terms of tax treatment of dividends versus interest payments would help inject new life into a moribund and indeed shrinking main market in the UK and put institutional investors on a more equal footing with private equity.

Sean Maher, London, UK

"The explanation is surprisingly simple"? I find your explanation is surprisingly simplistic. It's not that pension plans and insurers are restricted from participating by law, instead they are restricted by their own risk models and, to a large extent, by the incompetence of their highly institutionalised staff. The fact is that a pension plan has liabilities and cash flow requirements that HAVE to be met from their assets, while private equity firms only have to chase returns. They operate in completely different frameworks. Nor does this risk aversion explain poor pricing. Many firms carry a low valuation because they have a weak executive totally committed to filling their own pockets and egos. The idea that private equity firms are motivated by profit ignores the fact that corporate boards are also characterised by greed and spend most of their time inventing notional performance benchmarks and events to justify huge bonuses. The real villains are company directors.

Matt Winkler, London,

"With luck, something similar may now follow in Britain."..... And with Certainty? ..... Would that be 42 Lead?

amanfromMars, Seventh Heaven , Global Communications HQ

A very informative write-up, well explored with the fine-tooth juggleries of Stock market and their blips. But I would put my views with a different percept. Taking the cue from it....."Why some people get so rich, so fast without doing something remarkable? " If you delve into their psyche, or rather their business acumen and financial wizardy, it is observed that such men, well equally so for the females, do have an unsatiable hunger for money.The craving for big moolahs , compel them to take up venturesome and at times some foolhardy risks. They have a vision or a dream to follow... and in doing so they often turn monomaniac or workaholics in making fortunes.As for the blips or ups and downs in a stock market, my guess is as good as yours??? The market fluctuates and is as uncertain as London's weather.So may hay while the sun shines, and put up your hats or umbrellas while it may rain.State regulations on Pension and PF funds do acts as catalyst, and pushes up the Footsie index.

Sandy, New Delhi, India