Lots of Dollars, Little Sense
For reasons that aren't exactly clear, the supposedly smart people with all the money -- pension funds, university endowments and wealthy investors -- have decided it no longer makes sense for them to look for undervalued public companies, or promising new companies looking to go public. Instead, they prefer to put their money into private equity funds, which charge outrageous fees to look for undervalued public companies, or promising new companies looking to go public, and buy them up at a price 20 percent higher than the current stock-market price.</br></br>Of course, buying whole companies can get expensive, especially when you're talking about an energy giant such as Morgan Kinder or HCA, the country's largest hospital chain, just to give two recent examples. So to finance the deals, private equity managers have their newly acquired company issue lots of junk bonds, at high interest rates. These bonds are then bought by hedge funds, which also charge outrageous fees and also raise most of their money from pension funds, university endowments and wealthy individuals.</br></br>In a few instances, private equity funds have also begun to raise capital by issuing common stock, which also tends to be snatched up by the very same hedge funds, pension funds, university endowments and wealthy individuals.</br></br>And to top things off, the new owners invariably offer fat new pay packages to the managers of the company they've just acquired - - in most cases, the same managers who were running the company when it was public. The idea is to give them even greater incentive to maximize the value of the company, so it can be taken public again.</br></br>Now, if this sounds to you like a giant, circular Ponzi scheme, it's only because it is. As far as I can figure out, the winners will be the fund managers and their highly paid enablers, the investment bankers. And let's not forget the corporate managers, who have the chance to become fabulously wealthy if they are successful in stealing the company from public shareholders to whom they presumably owed a fiduciary duty, and later selling it back to public shareholders at a higher price.