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.