Thank you for your comment, Dalton.

You write of over-simplification and vagueries, but accounting is not an exact science and is therefore open to interpretation (and manipulation). Accounting scandals are very common and if references to Enron and WorldCom upset you, you can always think of more current examples, including that of Kraft Heinz (partly PE-backed), which recently saw the company restate 3 years’ worth of financial reports.

Please don’t assume that I am picking on the US. Over in the UK, the last few years have seen many high-profile cases hit the headlines (BHS, Carillion, Patisserie Valerie, Tesco, Sports Direct, ...).

Your assertion that lenders have a say over what EBITDA to apply leverage ratios to ignores the track record of loan providers in that respect. Banks (and private debt funds) employ other people’s money. The subprime mortgage bubble has taught us that bankers will keep on dancing as long as the music is playing, to quote Chuck Prince. Don’t expect them to use their judgment (and question accounting practices) if they know that they can syndicate their loans to third parties.

You rightly point out that many publicly-listed corporations (including the ones mentioned above) have their share of scandals. My post in no way implied that only PE- or VC-backed companies were users of accounting shenanigans. This is a widespread practice.

Yet the separation between public and private markets is very porous. Privately-owned businesses are not meant to stay that way forever. Any examination of the post-IPO performance of companies previously PE- or VC-backed proves that poor accounting practices can percolate into the stock markets. You will no doubt have heard of the lawsuits filed by investors against Snap over its disclosure of inflated performance data. You will also have heard that VC-backed WeWork is preparing an IPO and uses a metric called “community-adjusted EBITDA”.

Again, it would be naïve to think that, in the current bull market, PE and VC fund managers will not be tempted to get creative when valuing their portfolios and reporting performance. Sadly, there is a fine line between creative accounting and fraud. The purpose of my post was simply to raise a few red flags for the benefit of investors (and auditors). That deal makers and M&A advisers think such loose accounting practices acceptable should surprise no one - certainly not someone who has lived through the 1990s.