Adapt or Die
| Sep 11th, 2006 | Filed under: Institutional Investing | By: Alpha Male |
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By: Tim Price, UBP London
Published: September 11, 2006
(Private) equity funds are now giving hedge funds a run for their money as the pariahs of international corporate governance wrote David Skeel, a professor of law at the University of Pennsylvania, in the Financial Times last week. He went on:
The reason we hear so much about (private) equity funds and hedge funds is that they are the ghosts of the market’s future. As money that might once have gone to mutual funds pours into (private) equity funds and hedge funds, these funds will play a central role in international corporate governance. Even more momentously, they may increasingly assume many functions traditionally handled by banks. With the array of financial instruments now available to hedge the kinds of risks traditionally borne by banks, there is nothing to stop hedge and (private) equity funds from serving as lender as well as acquirer.. we are unlikely to look back on the (private) equity funds’ new buy-and-borrow trick as evidence of a crisis in corporate finance. Instead, it will look like another signpost on the way to a new financial order that we can barely even recognise right now.
Notwithstanding the fierce invective against this new financial engineering (by private equity locusts according to SPD chairman Franz Muntefering last year; by hedge fund highwaymen of the global economy according to Malaysian prime minister Mahathir Mohamad in 1997), these so-called alternative investments have in truth already joined the mainstream. Anyone who argues differently is in denial. In financial markets, as in every other aspect of life, change is part of the natural order of things. Those who seek to maintain the status quo and the balance of financial power in markets are arguing for the ossification of culture, and not least seeking untenable control over an otherwise Darwinian process. In looking for the rationale behind the flood of capital into alternative investments, the answer, quite understandably, lies in the palpable failure of what went before.
Before Niagaras of capital cascaded into hedge funds and private equity vehicles, those waterfalls of money were being poured into mutual funds. As ever in finance, the lexicon was deficient. A mutual fund implies co-ownership. Most mutual funds were and are anything but. More…
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