Grabbing the Money Flow

There was an article in the New York Times about a private equity firm that once again contributes to finance’s bad image. In case you haven’t noticed, I do not have much regards for hedge funds and equity firms; I regard them as being leeches on society. They make too much money for the value they contribute to society. The mental image I have of them is that they see a flow of money moving around the world and they stick out their hands to grab some of it, leaving nothing useful behind.

The NY Times article can be found here: Judge’s ruling offers peek into private equity’s secret world.

The short version of the story is this: a private equity firm bought a thriving, almost debt-free Greek telecommunications firm in 2005, using borrowed money. Then in 2006, the private equity firm tried to sell the telecommunications firm but found no buyers. So, next, the telecommunication firm sold 1.4 billion euros in debt which was then used to pay the private equity firm when the firm redeemed their complex securities received in the 2005 buyout. Let me repeat: the telecommunication firm loaded up on debt so that they could turn over the money to the private equity firm, who redeemed their securities. By 2009, the telecommunication company, struggling under the debt load, had to go into a form of bankruptcy.

So after a year of investment in the telecommunication firm, what value did the equity firm bring to the table to earn such outsized money? They loaded debt onto the company? Hmmm, I don’t think so.

Hedge funds get taxed on their income only 15% – I think it’s called the carried income tax – under the theory that taxes need to be kept low to induce them to make investments. I don’t know if private equity gets the same cushy deal called carried interest, but they are not making investments. One year is not long enough to be regarded as investment; that kind of investment is no where in the same category as the kind provided by venture capitalists, who invests money in start ups. No, hedge funds and private equity firms just put out their hands and grab some of the flowing money without providing any kind of value.

[divider]They are what’s called “the Takers”.[/divider]