Now Mainstream, Private Equity Loses Cachet

A new fund gives you a slice of private equity. Why that's a bad sign for the sector.
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A new mutual fund is being launched this month to cash in on the private-equity boom.

Steve Samson's Vista Capital Management is seeking investors for his Private Equity Plus fund, which will begin trading July 2.

"It's a traditional, open-end mutual fund that invests on a global basis in listed private-equity companies," he says. "Around the world, we have a universe of about 200 companies."

Think Blackstone Group, which is just going public. Think

Fortress Investment Group


, which went public earlier this year. Or think 3i in London, the Partners Group in Switzerland, Eurazeo in France.

Samson says he'll also look at business development companies and special acquisition companies as well as the private-equity vehicles traded on some public markets in Europe. "This is something I've been thinking about for over two years," says Samson. "A lot of these private-equity companies, even though they're not very well known, have performed extremely well over the last 10 years."

Samson has worked in the investment management business for 20 years, including spells as chief operating officer of Al Frank Asset Management and as CEO of Alternative Investment Partners.

The fund, to be sure, comes with pretty steep fees. The A shares carry a 5.75% front load and annual fees at 2%. This means you'll have handed over nearly 8% of your money in expenses within the first year. Those who subscribe directly by prospectus before June 29 can, at least, skip the front load. The prospectus can be found at the Vista

Web site.

Is this fund a good idea?

Undeniable fact: Private-equity funds have defied the laws of financial gravity for decades. Across the industry, private-equity vehicles have produced superior returns for their well-heeled investors through cycle after cycle.

The problem?

Private equity did all that when it was ... private. That meant small amounts of money. Select investors. Total flexibility and discretion. And patience. Today industry giants like Thomas H. Lee Partners are raising $10 billion funds.

Goldman Sachs

(GS) - Get Report

raised $20 billion.

Cue the law of diminishing returns.

It's like the old joke about overdrafts. Owe your bank $1,000 and it's your problem. Owe $1 million and it's theirs.

In the case of an investment fund, when you're looking to put $20 million to work, you're in charge. When you need to invest $20 billion, the market's in charge.

No wonder these guys are throwing money around like it's confetti and paying double for everything.

They're desperate.

This is Brewster's Billions. "Hey, does everybody want to go for lunch?"

It's going to be interesting to see the returns from some of these jumbo private-equity funds in five or seven years' time.

As for all the companies the private-equity crowd is taking over, one big question remains to be answered. To whom are they going to sell them when they need their exit? Santa Claus, perhaps. Or maybe the Chinese government -- they've got a lot of spare dollars.

Private equity gets less private by the day. As for the IPOs of management companies like Blackstone, when they go public, doesn't that mean they're selling shares to the public markets that they exist to beat?

Private equity is like a country club -- and that makes me feel like Groucho Marx. The funds and companies you really want to invest in are the ones that would never let you.

In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.