Not that long ago, the private equity folks were often called "masters of the universe." Actually, based on the compensation structure, it seemed that they could buy the universe, several times over.
Private equity firms were able to exploit market efficiencies as well as get access to cheap capital. And something else: they had the benefit of focus.
But over the past few years, some of the top private equity firms have diversified into other categories, such as hedge funds, venture capital and real estate. With a strong platform – and lots of capital – it seems like a no brainer. Right?
Well, reality has been much different, at least according to a recent piece in The Wall Street Journal. Just look at the Carlyle Group and KKR. Essentially, both firms are getting whacked by their exposure to the mortgage sector.
In fact, Carlyle's mortgage entity – Carlyle Capital Corp., which is traded on the Euronext Amsterdam exchange, has defaulted on some of its loans, even though they are high-quality offerings. Now we know that the firm ramped its leverage ratio over 30X!
As for KKR, it has its own debt vehicle – called KKR Financial Holdings (NYSE: KFN) – which is suffering from "high quality" mortgages.
If anything, these forays have become major distractions -- not to mention being big reputational hits.
I suspect that diversification is likely to be a strategy that gets much less emphasis going forward.
Tom Taulli is the author of various books, including The Complete M&A Handbook
