The real problem with private equity

From Eurointelligence (requires registration but is currently free) today:

In his regular FT Column, Tony Jackson argues that most of the criticism of private equity groups misses the point. He said the problem was neither profiteering nor lack of transparency, but the fact private equity companies "load a company with excess debt, then strip the cash out as a dividend. If this is done on a big enough scale, the fund can profit handsomely even if the company goes bust."

He said that the pre-private equity world had obvious safeguards against this: The banks would stop lending. But with the advent of credit derivatives all that has changed.

"Today, a bank can grant a leveraged loan with impunity, since it can offload the credit risk. And market demand for that risk is insatiable. The form of credit derivative known as the collateralised loan obligation, or CLO, feeds on just such loans."

To which my reaction is: That "insatiable" demand will surely not last for long. After all, the market for securitised UK home loans was affected by the big blow-out in the housing market c.1990, was it not ?

(I strongly recommend the Eurointelligence RSS feed - very useful for Italian and French political developments right now, as well as for the developing debate on ECB policy/governance which is a very important one for Ireland, and all Eurozone states.)

POSTSCRIPT(1510 hrs): I have just tried unsuccessfully to find the excerpt quoted above on the Eurointelligence website: it came to me in this morning's RSS feed from the site, so that is rather mysterious.

UPDATE (1520 hrs): Ah !here it is.

Update on Friday, May 16, 2008 at 12:06PM by Fergus O'Rourke

That item is now (again) unfindable on the Eurointelligence site. Sigh