The End of the Private Equity Party

Investing in a publicly traded private equity firm such as The Blackstone Group (BX), KKR (KFN) and Fortress Investment Group (FIG) during a credit crunch requires a bold dismissal of due diligence.

Unlike most investment companies, large private equity firms' portfolio construction and performance are impossible to know because of a lag in reporting and a secrecy of holdings. In addition, exorbitant fees and new accounting rules may make private-equity firms crumble in the new world of tight credit and renewed conservatism.

Blackstone, KKR and Fortress are all rated "sell" by TheStreet.com Ratings. Blackstone's shares have fallen 54% in the past year, and KKR's have tumbled 84% and Fortress' 85%.

Private equity firms tend to produce quarterly performance reports as many as five months after the close of a quarter. This means investors act on information that is usually irrelevant, particularly in current market conditions, where benchmark indices have posted the biggest declines in decades.

For example, if a private equity fund was carrying an investment in a financial institution that melted down in the second half of last year, the losses may not turn up in financial statements until the numbers are calculated for the fourth quarter, which might not be until May, making the loss finally visible in second-quarter 2009 filings. What comes to mind is TPG's ill-fated investment in Washington Mutual (WM), which was seized by the FDIC six months after TPG led a $7 billion investment. Or JC Flowers' disastrous $1.2 billion investment in Hypo Real Estate just three months before the German government and a consortium of banks bailed out the firm.