Eye on Private Equity: Embarrassing

David “Ruby” Rubenstein gave a keynote speech at the 15th annual venture capital and private equity conference at Harvard Business School earlier this week. His comments were at best embarrassing.

According to news reports, Ruby blamed both the private equity industry for doing deals that didn’t make sense and the investment banking industry for offering cheap debt with loose terms to finance the deals.

Specifically Rubenstein stated:

“I analogize it to sex. You realize there were certain things you shouldn’t do, but the urge is there and you can’t resists”

While the analogy may be funny to some and interesting on some level to others, this is an American leader of one of the largest private equity firms in the world speaking to one of our top business schools. As such, it would be a great place for Ruby to show some accountability for an industry that has gone wildly awry and lost untold billions for shareholders.

Comparing the private equity industry to the sexual urges of a teenage boy, for we assume most adults can control their urges, is not the type of accountability we would hope for from said leadership. Hope, of course, much like levering up to buy assets into cyclical tops, is not an investment process.

Into the weakness associated with the Barron’s cover article this past weekend, we covered our short position in Blackstone (BX) in our Hedgeye Portfolio, but suffice it to say we remain negative on the fundamental and ethical trends in the private industry and will likely be looking to re-short any strength.

With Obama’s forced expansion of US consumer lending, a steepening of the US Yield Curve, and the global TED Spread having narrowed to less than 100 basis points, the “Liquidity Crisis” of October/November 2008 is behind us. What we have now is an “Illiquidity Crisis” combined with a “Crisis in Credibility” – those two crises will be the crosses to bear for some, and create forced sale prices for the next generation of American capitalists who own liquidity.

Daryl G. Jones
Managing Director