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Private jets as evidence of agency problems in public companies

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There is aCorporate Greed piece on Bloomberg discussing a paper written by the Federal Reserve which cites the behavior of private equity firms with regard to private aircraft in acquired companies as evidence of agency problems in public companies.  Essentially, they say that since firms owned by private equity firms or that undergo leveraged buy outs operate smaller priave aircraft fleets than similar public companies, executives at the public companies are taking advantage of their public status and giving themselves excessive perquisites.

It may be true, but this does not strike me as evidence.  There is no proof that private equity does a better job of managing a business for the best long term performance.  In fact, private equity investors always have a relatively near term exit target (due to the life cycle of their funds) and frequently load up acquired companies with so much debt that they are left in a very precarious position once the p.e. investors leave or sell the business off to the public.  In such cases, it would make sense to cut the costs of private air travel even if it were not in the best long term interest of the business.  Anything that makes the operation look more profitable in the short term, or frees up cash flow to allow increased leverage is good from the p.e. perspective, but may have negative long term implications for the business.

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Written by mojofinance

April 9, 2011 at 7:08 pm

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