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.

Sarbanes-Oxley has been the last straw for some, with its auditing and reporting requirements imposing major new costs, especially on smaller companies. This has already played a part in the remarkable slowdown in U.S. initial public offerings. Today’s largest IPOs are taking place mainly on foreign markets, away from the reach of U.S. regulators. New York Stock Exchange CEO John Thain understands this as well as anyone, which is one reason for his $20 billion EuroNext purchase.

Thus, in its zeal to regulate away the risk of investing in public markets, government is making such markets less vibrant. And Larry Ribstein notes that this government-induced flow of investment capital into private equity isn’t all that healthy, either, and then wryly adds:

I’m confident that we’ll see that some excesses accompanied the boom in private equity, as they do every boom. In other words, there is some Enron of private equity waiting to happen.
When the scandal breaks, the politicians and the journalists will have their usual fun decrying the horrors of private equity. Watch for the Private Equity Reform Act of 2007. Everybody by then will have forgotten how all this was created by SOX, the child of the last scandal.

Is anyone really surprised that the government’s solution is worse than the problem?