Revisiting James Stewart's Den of Thieves

I recently reread Den of Thieves by James Stewart, 1991. Leverage finance remains a primary driver of revenues on Wall Street. Although the business is no longer dominated by Drexel Burnham, in many ways the dynamics of the business haven't changed. Collusion among private equity bidders, the over-compensating of bankers for their first/best ideas and the co-opting of roll-over management teams deprive public markets of full value for their securities.

The leveraged buyouts create high yield debt that is placed primarily with mutual funds and Collateralized Loan Obligations (CLOs) and less frequently with proprietary investors such as banks or insurance companies. This disenfranchising of the debt market (covenant gutting) further benefits the private equity business to the detriment of the public markets. Driven by the need for higher earning rates, public pension and endowment investors have, via private equity, reduced "fat cats" in corporate America but created them at private equity firms.

Given the high fees, friction costs (time and expenses) and high debt costs associated with leveraged buyout investing, private equity shops, post the crisis, have become more selective in their investments which has precipitated the growth in activist investing. For the most part activist investors identify the same value situations but agitate for value creation within the framework of a public company. A cooperative target can adjust expenses, cost effectively shed non-core assets and add low cost debt without the high fees, friction costs and high debt costs associated with a leveraged buyout. For public equity market investors, activist investing winning market share from leveraged buyout investing is a good thing -- for Wall Street, not so much.