Moody’s Savages Private Equity Borrowing Practices

Jul 9 2007 | 12:46pm ET

Moody’s Investors Services has issued a scathing attack on private equity firms, trashing the industry’s claim that companies are better off in private hands.

“The current environment does not suggest that private equity firms are investing over a longer-term horizon than do public companies despite not being driven by the pressure to publicly report quarterly earnings,” the report concludes. Moody’s is especially critical of the p.e. practice of borrowing to pay their own dividends, increasing rather than paying down a company’s debt.

“They’re taking capital out over a short period of time, providing themselves with a dividend in the first three years,” Moody’s analyst and report author Christina Padgett told Bloomberg News. “That’s not an investment; it’s a dividend.”

Padgett’s report goes on to accuse p.e. firms of fudging numbers to show an improvement in portfolio company performance, arguing that any uptick in performance is likely due to using debt to inflate returns, rather than the efforts of new, p.e.-installed management teams.

Unsurprisingly, the p.e. industry isn’t buying Moody’s’ analysis, with Douglas Lowenstein of the Washington-based Private Equity Council telling media outlets that p.e. ownership “can and does liberate management to focus on long-term growth.”

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