I don't follow the PE world closely enough to have any interesting thoughts on the specifics of how KKR operates vs traditional PE versus other options. But at a high level, it seems to me like Boland's ideas and the ideas in your posts are a case of idealogical maximalism vs pragmatism.
In my mind, the whole argument can be boiled down to the one point you made: percent owned is a vanity metric.
A portfolio strategy beats ideological purity: ESOPs, co-ops, PE, VC, etc, can cover different firm types. Stacking partial wins can add up to transfer at a massive scale even if none of the strategies is ideologically perfect.
Robin Hood is alive and well! I haven't been following financial services for years. The last time I looked MBAs were gobbling up small companies, firing the workforce and pocketing the capital. In these years of corrupt business practices masquerading as governance in the United States, this is mana from the corporate boardroom.
SSRI is right on in pointing to a time when robots are the majority of the workforce aka the day after tomorrow. The shift is inevitable so we need ways to ensure humans still thrive, though not necessarily in such large numbers. Thank you for awakening me to this important and surpising trend.
Given the prospects for using AI and much more automation as we reshore production in the US, the balance between capital and labor will continue to shift towards capital, so these ideas of making more people owners of capital is a good move. Otherwise they might not have the income required to buy the products the automation is producing.
I have been skeptical that some of this is really a net move to UBI type schemes, but your essay helps clarify some of that [although perhaps a little too long for a Substack article - as I only scanned the last 1/3, even granting that some repetition can be useful in discussing new or complex ideas]. I suspect more education of employees and small business owners might still be necessary to help convince all parties to their net benefit - short term or longer term, as applicable.
I will plan to copy this essay into Word for a later reread to help cement my understanding of the available options.
When you said in your last paragraph " ... quest for full ownership of the economy, ... " that triggered a thought that people also need to have a better gage as to the value of their respective human capital, but perhaps that is really nothing more than obtaining or realizing the value the marketplace puts on various skills/education/talents at any given time and place. Maybe the current methods of collecting and publishing that type of information could be further improved over what is available now, and means provided to alert more employees/job seekers as to that sort of data.
I definitely think that's one version of what could happen. There could very well be a future in which work is sufficiently automated to the point that we don't need to work as much. At that time, it would be much more beneficial for us to all be equity owners than to earn a salary alone, and benefit collectively from what our economy does. (And the alternative, that only a few people own all of that capital isn't ideal!)
“But the money KKR earns isn’t pure profit. After paying off debts, about 80% of PE profits go back to the limited partners that invested the money to begin with.”
Not that the rest of the article doesn’t include interesting ideas, but yikes. Qualifying profit distributed to external partners as somehow different from that going to the main guys is…interesting. And unnecessary to the rest of the article.
The uses employees put their "capital payouts" to will depend on their individual situations and circumstances, but for most it should not be considered income for living expenses as wages/ salary, but as a chunk of $ for additional investment, possibly eventually as one of those limited partners. Isn't the longer term goal of this whole exercise to convert the "little guys" into "middle or higher" guys? And PE type payouts could and probably should constitute a "higher risk" component of a balanced portfolio coupled with other lower risk value and fixed /bond income components. Thus maybe be 50% of the portfolio at a young age, declining to 10 or 15% as they near retirement, etc.
Perhaps the greatest risk is that (even with enhanced education in HS, or wherever, about finance and economics and investment) too many people are just not really oriented to making money via investments over "working". Then again, I suppose a "cultural realignment" could help more people make a reasonable transition, even if they are not interested in following the details of the market day to day or year to year.
Whether you are for or against what PE is doing as a whole, don't we want it to work better? Or to come up with options that deter us from needing it at all?
Of course I'm all in for making it work better. I've been in PE for most of my career (albeit first as a corporate investor and now personally). I just don't like the "bail out" approach which this latest move looks like.
I would eliminate this option for PE. Sophisticated investors can assess PE (barely, at times) but not retail. Nor can average money managers - i.e., the 'gate keepers' of the 401k funds.
I don't follow the PE world closely enough to have any interesting thoughts on the specifics of how KKR operates vs traditional PE versus other options. But at a high level, it seems to me like Boland's ideas and the ideas in your posts are a case of idealogical maximalism vs pragmatism.
In my mind, the whole argument can be boiled down to the one point you made: percent owned is a vanity metric.
A portfolio strategy beats ideological purity: ESOPs, co-ops, PE, VC, etc, can cover different firm types. Stacking partial wins can add up to transfer at a massive scale even if none of the strategies is ideologically perfect.
Totally. Ideological purity would keep a lot of other good things from happening here. We can’t hold the bar there.
I just found this somewhat indirectly related item in City Journal:
https://www.city-journal.org/article/wesley-lepatner-murder-blackstone-housing-private-equity
By Judge Glock; Blackstone Doesn’t Hurt the Housing Market—It Helps It
Those who condemn the investment firm ignore the benefits of private equity.
PE does not have to be evil incarnate.
Excellent education. Ty!
Robin Hood is alive and well! I haven't been following financial services for years. The last time I looked MBAs were gobbling up small companies, firing the workforce and pocketing the capital. In these years of corrupt business practices masquerading as governance in the United States, this is mana from the corporate boardroom.
SSRI is right on in pointing to a time when robots are the majority of the workforce aka the day after tomorrow. The shift is inevitable so we need ways to ensure humans still thrive, though not necessarily in such large numbers. Thank you for awakening me to this important and surpising trend.
Given the prospects for using AI and much more automation as we reshore production in the US, the balance between capital and labor will continue to shift towards capital, so these ideas of making more people owners of capital is a good move. Otherwise they might not have the income required to buy the products the automation is producing.
I have been skeptical that some of this is really a net move to UBI type schemes, but your essay helps clarify some of that [although perhaps a little too long for a Substack article - as I only scanned the last 1/3, even granting that some repetition can be useful in discussing new or complex ideas]. I suspect more education of employees and small business owners might still be necessary to help convince all parties to their net benefit - short term or longer term, as applicable.
I will plan to copy this essay into Word for a later reread to help cement my understanding of the available options.
When you said in your last paragraph " ... quest for full ownership of the economy, ... " that triggered a thought that people also need to have a better gage as to the value of their respective human capital, but perhaps that is really nothing more than obtaining or realizing the value the marketplace puts on various skills/education/talents at any given time and place. Maybe the current methods of collecting and publishing that type of information could be further improved over what is available now, and means provided to alert more employees/job seekers as to that sort of data.
I definitely think that's one version of what could happen. There could very well be a future in which work is sufficiently automated to the point that we don't need to work as much. At that time, it would be much more beneficial for us to all be equity owners than to earn a salary alone, and benefit collectively from what our economy does. (And the alternative, that only a few people own all of that capital isn't ideal!)
“But the money KKR earns isn’t pure profit. After paying off debts, about 80% of PE profits go back to the limited partners that invested the money to begin with.”
Not that the rest of the article doesn’t include interesting ideas, but yikes. Qualifying profit distributed to external partners as somehow different from that going to the main guys is…interesting. And unnecessary to the rest of the article.
The uses employees put their "capital payouts" to will depend on their individual situations and circumstances, but for most it should not be considered income for living expenses as wages/ salary, but as a chunk of $ for additional investment, possibly eventually as one of those limited partners. Isn't the longer term goal of this whole exercise to convert the "little guys" into "middle or higher" guys? And PE type payouts could and probably should constitute a "higher risk" component of a balanced portfolio coupled with other lower risk value and fixed /bond income components. Thus maybe be 50% of the portfolio at a young age, declining to 10 or 15% as they near retirement, etc.
Perhaps the greatest risk is that (even with enhanced education in HS, or wherever, about finance and economics and investment) too many people are just not really oriented to making money via investments over "working". Then again, I suppose a "cultural realignment" could help more people make a reasonable transition, even if they are not interested in following the details of the market day to day or year to year.
You're right. Did some rewording there to make my point more clear. Thanks for catching that!
Isn't the entire point of opening up 401k for PE is for PE firms to offload their bad investments onto the retail sector?
Whether you are for or against what PE is doing as a whole, don't we want it to work better? Or to come up with options that deter us from needing it at all?
Of course I'm all in for making it work better. I've been in PE for most of my career (albeit first as a corporate investor and now personally). I just don't like the "bail out" approach which this latest move looks like.
Totally fair. What would you change to get rid of that effect? Any ideas?
I would eliminate this option for PE. Sophisticated investors can assess PE (barely, at times) but not retail. Nor can average money managers - i.e., the 'gate keepers' of the 401k funds.
I post my thoughts here on an article that I agree with 100%.. https://www.racket.news/p/private-equity-managers-are-primed/comment/144955178
That makes sense, I’m definitely for reforms that make the whole thing work better.