10/12/2012 05:11 pm ET Updated Dec 12, 2012

The Public Eye on Private Equity

Private equity. It conjures up dark corners of Wall Street, financial operators far from view, distant from our everyday lives.

And yet private equity is... everywhere. The likes of KKR, Blackstone and Carlyle have become sprawling conglomerates with publicly traded shares, with responsibilities to huge public investors. They employ millions in the U.S. alone. And they own so many companies that touch all of us every day.

They own everything from Toys "R" Us to Hilton. The Weather Channel, Petco, the Container Store, Outback Steakhouse. The list goes on, and on. KKR and TPG bought TXU Corp., Texas's biggest power producer, for $43.2 billion in 2007. That stands as the biggest leveraged buyout ever, and was important for more than just its size. It also involved lots of negotiations outside the boardroom: Environmentalists were courted. Testimony was given across the state. So much for operating behind the curtain.

Mitt Romney's campaign for president dragged private equity into the public eye and turned the harsh spotlight of a presidential race on its practitioners. Romney's opponents turned what he'd promoted as a key qualification for the presidency -- his history as a successful turnaround expert and founder of Bain Capital -- into fodder for campaign ads decrying Romney as an outsourcing factory closer.

So much for that whole "private" thing.

While we're at it, "equity" seems insufficient. True, Henry Kravis (KKR), Stephen Schwarzman (Blackstone) and David Rubenstein (Carlyle) all remain deep in the business of buying and selling companies, using cash collected from investors paired with Wall Street-provided debt. But their ambitions run deeper.

Blackstone, the largest of these firms at about $190 billion in assets under management, only gets about a fifth of its profits from the traditional private equity business -- the practice of buying and selling companies. The balance is from buying real estate, making loans to companies and managing hedge funds for clients, and providing merger and restructuring advice to companies large and small. (Blackstone successfully negotiated the $2 billion sale of the Los Angeles Dodgers earlier this year).

KKR has pursued a similar path. The firm best known for its starring role in the takeover of RJR Nabisco -- detailed in the seminal business book, Barbarians at the Gate -- runs its own hedge fund, buys real estate and even underwrites stock and bond offerings.

Carlyle, too, is branching out. Already the most global of the firms -- with 32 offices and dozens of funds across the world -- is bolstering its non-LBO businesses led by former Morgan Stanley executive Mitch Petrick. Earlier this month, they bought majority control of a commodities hedge fund manager.

All of this means that these massive firms have even greater sway over the global economy and the attendant responsibility.

In the wake of the global financial crisis, big investors -- especially public institutions like state pensions -- are rightly skeptical of private equity. The pensions are demanding more information and refusing to pay some of the more exorbitant fees that defined and fueled the biggest investment firms. Some of those investors are going a step further, pressing for discussions around "double bottom lines" and "secondary returns." In short, asking for evidence that these firms aren't just focused on investment returns.

The biggest names seem to responding. KKR co-CEO George Roberts (the 'R' in 'KKR') said recently that the scope of his firm's holdings -- companies that employ a million workers and generate $200 billion in annual revenue collectively -- dictates a different way of operating. "These people live and work in communities that are affected by the decisions those companies make," he said in a rare interview. "We have an obligation not just to the investors who invest with us, but to all other stakeholders." His firm, along with Carlyle, each put out annual reports detailing their ESG (environmental, social and governance) initiatives.

Still, the broader public, and lawmakers in Washington, remain befuddled as to how to deal with all of this, and what this giant industry's growing footprint means for society at large. Even after November, the private equity industry won't be able to slip back into the shadows. Their much-discussed tax treatment -- whereby profits are considered capital gains -- will almost certainly be part of either president's comprehensive tax reform plan.

Does all this attention mean the end of Blackstone, KKR and Carlyle? Hardly. Those firms are only becoming more powerful. With public stock as currency and new lines of business, they're still growing. All told, the industry across its various forms encompasses $3 trillion in assets, according to researcher Preqin.

Private equity may be poorly named, but it's just getting started.