Following up on thoughts expressed in this post on the Kinder Morgan leveraged buyout from earlier this week, this Opinion Journal editorial (and related WSJ ($) article) note that the trend toward private equity financing is a direct result of management realizing that public equity has become too pricey in the regulatory maze of the post-Enron era:
Behind much of this trend is basic economics. Hedge funds, pension funds and endowments are all looking for new places to invest their mountains of cash, and private equity has been offering some impressive returns. Corporate management, meanwhile, far from running from these new barbarians at their gates, often see a financial upside. With capital abundant, the cost of borrowing low and return on equity soaring, why not?
But that’s hardly the whole equation. At least part of the strength of private equity is a direct result of the problems besetting public markets. Public-to-private deals are in fact lengthy and costly and can lead to unpleasantness with shareholders–often via lawsuits. The fact that so many companies have nonetheless been willing to take the plunge speaks volumes about how eager they are to escape the increasing burdens of public-company regulation.