Private Equity Players Hit the Big Time: An'Out-of-Body Experience' (Knowledge@Wharton)

... Boards and executives are so concerned with Sarbanes-Oxley and compliance that they take very little risk in running their companies. Board members now come to meetings with their own lawyers, Schwarzman said, adding that accounting changes limiting write-offs for extraordinary events, such as plant closings or layoffs, prevent corporate executives from taking steps to enhance their business for fear that their earnings will take a major hit. "We have a bit of a broken system right now and the solution for these frustrated managers is to sell their businesses to private equity."

... If today's climate for private equity is so hospitable, what could cause clouds to form? Schwarzman said that while the capital markets side of the equation is a happy accident for the sector, capital markets never stand still. Eventually, the interest rate spread will grow wider, reducing private equity's ability to generate huge returns on leveraged investments. "Nobody knows when or why it will happen. But it's hard to imagine it can get better than it is [today]. We're at maximum advantage in all probability right around now."

Start-Ups Increasingly Add Debt to Stay Afloat (WSJ StartupJournal)

Though they remain largely out of the spotlight, venture-debt providers are growing fast, becoming some of Silicon Valley's biggest stakeholders. They loaned nearly $2 billion to U.S. venture-backed companies last year, up from $434 million in 2002, according to research firm VentureOne. In total, debt formed 7% of the money invested in U.S. venture-backed companies in 2006, up from 2% in 2002.

While venture debt isn't new, it is becoming more important because it is taking longer for start-ups to go public. In 1999, the median start-up took three years to go public from the time it first got financing. That wait has now doubled to more than six years, according to VentureOne. Many companies thus need more money to stay private longer, creating more opportunities for venture lenders.

The Uneasy Crown (The Economist)

... Firms in private-equity portfolios are free of the most onerous regulations to which public companies are subjected, such as aspects of America's Sarbanes-Oxley act, which was rushed into law after the collapse of Enron. They are subject to less scrutiny in the press, especially when it comes to short-term dips in profits. And they can pay executives whatever they wish without facing an uproar. Compared with public companies, private-equity firms tend to be more generous in rewarding good performance, but they punish failure more heavily. Given that many of the most talented executives are risk-takers who want to get rich, it is no surprise that many are switching to private equity.

The "drain of management talent at all levels to private equity is one of the main reasons I am open to taking the firm private," the boss of a company with a market capitalisation of $16 billion recently told The Economist. That is the most striking difference between private equity today and in the 1980s, says Chicago's Mr Kaplan. "In the 1980s company bosses were implacably opposed to LBOs. Now they see an opportunity to be able to do a better job and be better paid when they succeed."

... And there are the diseconomies of scale common to any business that has grown so far from its entrepreneurial roots. Not for nothing have the biggest private-equity firms been called the "new conglomerates". They are sprawling empires, with extremely diverse firms to manage.

... Activist hedge funds are also putting pressure on likely targets to increase their borrowing. This, they think, will both increase the value of the firm in just the way it would under private-equity ownership, and remove one of the main incentives for private equity to buy. Perhaps the greatest threat to the continued growth of private equity is regulation. The burden on public companies may be eased. Sarbanes-Oxley is likely to be given a makeover this year, with its notorious section 404 on internal controls watered down. On the other hand, politicians may increasingly try to regulate the private-equity industry.

One chief executive recently observed: “The moment a public pension fund loses 20% of its value due to some private-equity investment going wrong, private equity will get its own Sarbanes-Oxley.” The new kings of capitalism must try to prevent this from happening by showing that they really are a force for good.

2006 VC Investment by State

For the full year, California firms obtained 48% of the $25.5 billion invested in more than 3,400 deals, nearly two times as much as Massachusetts.