Are Buyout Funds Appropriating Profits?

Cite this Article
Bill Sjostrom, Are Buyout Funds Appropriating Profits?, Truth on the Market (January 29, 2006),

Today’s NYT has a sobering article entitled Public Companies, Singing the Blues. The article discusses a question raised by Daniel Loeb, a famous hedge fund manager, at a dinner of buyout kings in Davos, Switzerland (the site of the World Economic Forum).

Loeb’s question: “Why can buyout firms take public companies private and make enormous returns, while the same type of returns seem out of reach for public companies and their shareholders?â€? He went on to say that buyout firms “were essentially arbitraging the public markets and ‘are appropriating profits that should belong to public shareholders.’”

As the article states, there are various advantages to being private: less regulation, fewer pesky shareholders, bolder and more useful boards, less focus on the short term, etc. Buyout funds take public companies private to capture these advantages. But are they fleecing public shareholders in the process as the article suggests? They can’t be, at least in the long term. My guess is that Loeb was just being sensationalistic. If there really is an easy arbitrage opportunity in the buyout market resulting in abnormal positive returns, a lot of money will flow into buyout funds (as it has been), more money and funds will be chasing deals, buyout premiums will increase, and the easy arbitrage profit will disappear.