Chapter 7: The Dark Side of PE - Greed, Destruction and the Push for Transparency
Every industry has a chapter it would rather skip. For private equity, this is that chapter. Demaria titles it “Private Equity and Ethics: A Culture Clash,” and he does not hold back. Fraud, job destruction, fake philanthropy, and the long fight for transparency. Let’s go through it.
Greed and Fraud: The Hall of Shame
The chapter opens with straight-up fraud cases, and they read like crime novels.
AA Capital Partners in Chicago managed $200 million for union pension funds. One of the founders, John Orecchio, used the money for strip clubs, a horse farm for his mistress, luxury cars, jewelry, and a condo in Las Vegas. He had the CFO make at least 20 withdrawals from client accounts, totaling $5.7 million. He also lied to his own business partner about investment costs, pocketing $6.9 million in the difference.
Danny Pang of Private Equity Management used family members to cash checks just under the $10,000 reporting threshold, moving around $83 million. He also allegedly defrauded Asian investors for up to $654 million.
Then the Abraaj Group, once the largest fund manager in the Middle East at $14 billion. Investors including the Gates Foundation accused them of mismanaging $230 million from a healthcare fund. KPMG investigated and cleared the firm, but KPMG’s Dubai CEO had a son working at Abraaj. Not a great look. The firm collapsed in 2018, and founder Arif Naqvi was indicted for personally stealing $250 million.
Beyond outright theft, Demaria covers subtler problems. Collusion between hedge funds and PE firms to force companies into buyouts. Insider trading networks like the Galleon case. Pay-to-play schemes where 19 PE firms got advisory mandates from pension funds by donating to politicians’ campaigns. Carlyle alone paid $20 million in fines.
And then there is valuation manipulation. A fund of funds called Roc Resources changed the valuation of a Romanian holding from $6 million to $9.2 million, flipping the fund’s IRR from negative 6.3% to positive 38.3%. With that fake number, they raised $55 million from new investors. This is why trusting reported numbers without digging into them is dangerous.
Destruction: The Jobs Question
This part is honest. Private equity is technically a net job creator in Europe and the US. Venture capital creates new companies from scratch, so obviously new jobs follow. But Demaria makes two important points people usually skip.
First, many of those venture-funded jobs are temporary. If the startup fails (and most do), those positions disappear. Worse, the startup may have killed existing jobs at established companies. Think about how ride-sharing apps replaced stable taxi driver jobs with gig work. The net effect on society is not always positive.
Second, LBOs create jobs over the mid to long term, but in the short term, they often cut them. People get laid off. The workers who lose those jobs may have skills that are hard to transfer. The cost of retraining them falls on society, not on the PE fund that made the cuts. The company eventually grows and hires again, but the new jobs might need completely different people.
As PE manages more capital, its responsibility grows. Fund managers have enormous control over portfolio companies. They could push for better social and environmental practices. The Environmental Defense Fund even created an ESG tool specifically for PE with 22 measurable criteria. But when financial analysis says “cut costs” and ESG analysis says “invest in people,” which one wins? Demaria argues this conflict sometimes reveals the cost-cutting strategy itself is flawed.
Philanthropy: The Fig Leaf
This section is short and brutal. Demaria calls philanthropy in the PE world mostly self-promotion. Fund managers throw expensive galas, write big checks to charity, and get their names on buildings. Meanwhile, they fight hard to avoid treating carried interest as regular income for tax purposes.
The contrast is stark. They resist paying taxes that would fund public services for everyone, then make a big show of selective giving to causes they personally like.
He also points out that uncoordinated philanthropy can do harm. Foundations dumping money into one medical research area drain talent from other fields. “Venture philanthropy” sounds nice, but applying the PE model to non-profit work has problems. In PE, everyone is aligned by profit. In philanthropy, motivations are scattered: reputation, religion, guilt. Measuring impact is way harder than measuring returns.
What actually works better? Reputation pressure. When CalSTRS pushed Cerberus to drop Freedom Group (the company that made the gun used in the Sandy Hook shooting), it took years but it happened. The company went bankrupt in 2018. Naming and shaming is a stronger force than galas.
Transparency: The CalPERS Moment
In 2002, a court ruled that CalPERS had to publish the performance of its PE investments under the Freedom of Information Act. This was a turning point. Suddenly, fund performance was no longer secret. Investors could compare fund managers side by side. They could see what fees were being charged and whether the marketing pitch matched reality.
Fund managers hated it. Not because it hurt their portfolio companies, but because it hurt their ability to control the narrative. Some fund managers actually refused to accept money from public pension funds rather than accept transparency. That reaction tells you everything.
The positive side? Entrepreneurs also got better informed. Serial founders started sharing their experiences with investors through sites like TheFunded.com. The information gap was closing from both sides.
Demaria notes that full transparency in PE will never happen. And that is actually fine. Some confidentiality protects portfolio companies. What matters is reducing the information gap between fund managers and their investors. More data is not the same as better understanding.
Self-Regulation vs. Imposed Rules
Demaria makes the case for international self-regulation, while admitting it sounds optimistic. National regulation does not work because PE funds operate across borders. And as big PE firms expand into hedge funds, real estate, debt, and advisory, internal conflicts of interest multiply.
The industry should publish standard fee structures, adopt consistent valuation methods, and enforce rules with real sanctions like banning bad actors. Whether it will do these things voluntarily? Well.
The SEC stepped up after the 2008 crisis, requiring PE managers above $150 million to register and comply with the Dodd-Frank Act. But with 800 employees monitoring 11,000 investment advisors, the regulator is stretched thin. Hiring 400 more people was probably not enough.
The deeper issue Demaria highlights is compensation. Fund managers make enormous money. The people who are supposed to oversee them at pension funds and endowments make modest salaries. This creates a brain drain problem. The best people either join the fund managers, start their own shops, or, in the worst cases, collude with the people they are supposed to watch. You cannot build good oversight when the watchdogs are underpaid.
The Bottom Line
Private equity will always be partly opaque. That is built into how it works. But the chapter’s main point is this: everyone in the chain, from fund managers to investors to regulators, needs to be watching everyone else. No single actor can police the system alone. Checks and balances are not a nice-to-have. They are the only thing standing between private equity and its worst impulses.
Reputation is the real currency. Fund managers who abuse trust will eventually lose access to deals, talent, and capital. The question is how much damage they do before that happens, and whether the system catches them fast enough.
Previous: Chapter 6: Trends and Fads