Gretchen Morgenson yesterday wrote a big piece for The New York Times about private equity, essentially arguing that its endemic secrecy does not comport with its reliance on public pension investors.
A lot of stuff in there had already been reported, such as private equity’s knee-jerk transparency reticence and the fact that limited partners (including public pensions) will cover the portion of collusion case settlements that aren’t already covered by insurance. But there also was information we didn’t know, such as how Kohlberg Kravis Roberts & Co. (KKR) has a clause in one of its flagship funds that allows it to “reduce or eliminate the duties, including fiduciary duties to the fund and the limited partners to which the general partner would otherwise be subject.”
The full piece is worth a read, and can be found here. And, if you do so, here are some follow-up thoughts:
1. Morgenson writes of the collusion case that “municipal employees and retirees pay part of that settlement cost.” Well, not really. The pension’s assets will be reduced by that amount, but it’s not as if the settlement directly eats into retiree payments. If the system goes under or institutes payment reductions due to underfunding, then there is a causation, but the story incorrectly makes it seem like today’s retirees are out cash.
2. It’s too bad Morgenson never notes that the much broader issue of LP payments relates to run-of-the-mill class-action lawsuits (or threats of class-action lawsuits) that now seem to be brought in every single take-private (whether or not it has merit). In almost all of these situations, the private equity firm settles and LPs are on the hook for legal costs not covered by insurance. Nor does she delve at all into the collusion case itself, where the underlying legal premise has always been questionable.
3. Much of her story compares redacted versions of limited partnership agreements obtained via state FOIA requests to unredacted versions obtained by the NYT — including on from The Carlyle Group (CG) — with an emphasis on how overwrought the black-lining is. In general, such redactions often are made by law firms trying to protect their own “proprietary” LPA docs, rather than the PE firm trying to pull one over on someone (not that the latter hasn’t also been known to happen).
4. All of this leads back to a point I first made in May: Private equity should simplify and standardize LPA docs. Read my earlier argument by going here.
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