Moody's criticism of Private Equity: Part 1 of 2

The FT recently reported on Moody's criticism of private equity:

Moody's takes issue with the argument that private ownership frees companies from the short-term pressures of equity markets, enabling them to invest and plan for the long term. Its report says: "The current environment does not suggest that private equity firms are investing over a longer-term horizon than do public companies despite not being driven by the pressure to publicly report quarterly earnings."

The agency says buy-out funds' tendency to increase a portfolio group's indebtedness to pay themselves large dividends runs counter to their claim of being long-term investors. It cites the dividend received by Thomas H Lee, Bain Capital and Providence Equity following their takeover of Warner Music in 2004 and the one paid to Blackstone after the purchase of Celanese.

It also takes aim at private equity's claim that improvements in companies' performance are driven by more focused management teams rather than financial engineering and higher debt.

The private equity industry rejected Moody's claims. "Corporate leaders who have experienced . . the positive effects of private equity ownership are quick to tell you that this structure can and does liberate management to focus on long-term growth," said Doug Lowenstein, president of the Private Equity Council. There was "compelling evidence" that private equity made companies "stronger".

(Part 2: My two cents.)