As investment banks and hedge funds struggle, private equity—a business predicated upon raising capital subject to long-term lock-ups to invest in assets using large amounts of leverage—is enjoying go-go times.
hen the Detroit Pistons opened their 2017-2018 season to a sellout crowd and a big welcome from rapper Eminem, the team’s owner, billionaire Tom Gores, beamed courtside. Yes, the gleaming new $863 million downtown arena was worth celebrating, but Gores was finalizing the deal of his lifetime, a ten-digit payout from his Beverly Hills buyout firm, Platinum Equity Partners.
Private equity firms, normally secretive about their internal economics, are loath to discuss these sales. Gores declined to comment, as did pretty much all his private equity tycoon peers. However, based on months of reporting and dozens of interviews with insiders and investors in these funds,has been able to identify 13 new billionaires who have unlocked fortunes by this financial engineering. Ever heard of Steven B.
The business reasons for these stake deals are abundant. Cash is pouring into private equity. When new funds are formed, institutions generally insist that firms show skin in the game by putting their own money into funds. However, liquidity can be an issue, especially for younger firms. These GP-stake sales free up cash, provide permanent capital and can help solve complex succession issues.
But then came the Great Recession, the massive government bailout of financial institutions and the Occupy Wall Street movement. Schwarzman and other Wall Street denizens suddenly became villains. So it’s no surprise that the current boom in buyout billionaires is happening out of the spotlight. The hedge fund boom was ending, and private equity—with its 10-year life span funds— seemed like a better deal. Assets under management are stable, making those 2 percent fees associated with them more predictable. Limited partners almost never default on the capital commitments.
Either way, the government is collecting less tax revenue, because Dyal’s investors are often foreign and tax-exempt institutions and its funds use structures known as “corporate blockers,” which protect investments from taxation. In July 2016, Silver Lake, a private equity firm known for tech deals like Skype and Alibaba, tapped Dyal to raise $400 million. At the time, the Silicon Valley-based firm managed $24 billion and the deal valued the operation at about $4 billion. Silver Lake was founded in 1999 by tech investing pioneers Jim Davidson, Glenn Hutchins, Dave Roux and Roger McNamee. McNamee left early on in 2004, and by 2013 Davidson, Hutchins and Roux had also moved on.
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