Dueling Fools: Private Equity Bull Rebuttal

My dueling counterpart, Tom Taulli, brings up a lot of good points when it comes to the recent rash of private equity buyouts. And it is very likely that the number and size of the deals being done will eventually lead to some amount of a pullback when the buying slows down. Is this enough for me to condemn private equity's role in the market right now?

Nope.

The investment banking problem
As Tom points out, the bulge bracket investment banks such as Goldman Sachs (NYSE: GS) and Merrill Lynch (NYSE: MER) have been taking a more participatory role in the private equity deals. Goldman, for example, recently raised a $20 billion private equity fund and is taking leading roles in major buyouts such as the fresh-off-the-presses $28 billion buyout of Alltel  (NYSE: AT).

The banks that are buying into these deals do act as advisors, but typically to the buyers. In the Alltel deal, for example, Goldman and Citigroup (NYSE: C) were the advisors to TPG and GSCP (Goldman's PE arm), while Merrill, Stephens, and JPMorgan (NYSE: JPM) were Alltel's advisors. Since the investment banks always have an incentive to close deals and collect their fees, I see it as a positive when they're also putting down their own money on the deals.

The management problem
Management is also frequently taking part in the going-private deals, and that is a more pressing concern to me. Since top executives are often given a piece of the company when it goes private, they have the distinct incentive to push in favor of the deal; this problem is exacerbated when management has very little stake in the company to start with.

But this is a problem that runs much deeper than private equity buyouts. The proposed megabank merger between ABN Amro (NYSE: ABN) and Barclays (NYSE: BCS), and the reluctance to consider a rival bid from the consortium led by RBS, shows that managers' preference for a nice, safe buyer that will most likely let them keep their jobs can likewise taint a deal. In many cases -- private equity or not -- company managers simply don't act like good stewards for shareholders.

Problems, problems everywhere
The PE run is not a magical fairy tale where everyone lives happily ever after. These buyers are taking a lot of dead wood out of the markets, though, and giving many investors quick returns on their investments. Would I invest in the major PE funds right now? Probably not, but I like what they're doing for the public markets.

Wait! You're not done. Go back and read the other arguments about private equity. Then vote for the winner.

JPMorgan Chase is an Income Investor recommendation. Fool contributor Matt Koppenheffer hasn't done any billion-dollar buyouts lately, but he did buy a whole bunch of groceries yesterday. He does not own shares of any of the companies mentioned. The Fool's disclosure policy isn't a public company, but if it were, it'd go private -- it's just so chic right now.