This week, some of the top veterans in private equity -- TPG's David Bonderman, Carlyle's David Rubenstein, and KKR's George Roberts -- got together at a conference in Hong Kong. And, all in all, it was fairly depressing (hey, I guess that's what happens when you lose billions and billions of dollars).
Take Bonderman. He thinks the downturn will be protracted, calling it an L-shaped recession (the more common description is a V-shaped recession, which means there is a strong snapback). In fact, he thinks U.S. unemployment will hit 10% or so.
Then again, keep in mind that Bonderman lost about $1.3 billion on his six month investment in Washington Mutual.
Despite all this, Bonderman still has an appetite for investments. For example, he's focusing on the debt securities from hedge funds. Because of massive redemptions, the prices are at distressed levels.
Rubenstein also gave a grim presentation (he thinks the downturn can last several years). But, he is still bullish on some opportunities, especially in Asia. For example, he thinks China offers some compelling valuations and that the country may become more open to outside investments.
We're going to resist using a cute Olympic analogy, but the latest results on China venture investment from Dow Jones VentureSource are pretty impressive.
Total second-quarter venture investment in China totaled $1.27 billion, which was sunk into 71 deals. That's more than double the $662 million invested in 69 deals during the same period in 2007, representing some fatter rounds for young Chinese companies. The median deal for the quarter was $10 million, Dow Jones VentureSource said, with most going to later-stage companies.
The results were somewhat skewed by a $430 million investment in Oak Pacific Interactive, an Internet portal aggregation startup, the report notes, but even excluding that deal the investment levels are the highest since the third quarter of 2003.
Last year, the Chinese government invested a cool $3 billion into The Blackstone Group LLP (NYSE: BX). It was before the IPO and seemed to be a good bet.
Of course, it wasn't. Shares of Blackstone have plunged since.
Despite this, China is still hungry for private equity. In fact, according to a report in the Financial Times, the State Administration of Foreign Exchange of China has agreed to invest $2.5 billion in TPG's latest fund (which may reach as much as $20 billion).
Simply put, China is overflowing with cash, so why not seek out higher returns?
True, private equity is ailing right now, but then again, the investment horizon is for the long-term. And with lower valuations, private equity firms are positioned nicely to pick up some attractive buyouts.
Something else: TPG has a strong track record. And by all accounts the firm is continuing its winning ways, such as with its latest score in selling Alltel to Verizon Wireless, a joint venture of Verizon (NYSE: VZ) and Vodafone (NYSE: VOD).
The Blackstone Group LP (NYSE: BX) is planning to launch Blackstone Altius Advisors, a business focusing on event-driven investments in the Asia Pacific region and led by Aaron Nieman. The business will be based in Hong Kong and additional team members will operate from New York and Tokyo.
Aaron Nieman, Atius' Senior Managing Director and Chief Investment Officer, joins Blackstone after significant experience at S.A.C. Capital Management's Asia Pacific merger arbitrage division and at Lehman's Brothers Tokyo and Asia Pacific Global Trading Strategies Division. Also joining the team as Chief Operating Officer is Christopher Pesce. He has experience as Bank of America's Global Head of Prime Brokerage and with Goldman Sachs in New York and Hong Kong.
Blackstone Altius Advisors joins Blackstone Capital Partners and Blackstone Real Estate Partners, as well as a hedge fund and two closed-end mutual funds in Blackstone's Asia operations.
Shares of Blackstone were up a marginal $0.04 at $19.01 in early market trading, and now shares are down marginally by $0.05 at $18.92.
Dubai International Capital and Chinese private equity First Eastern Investment Group have announced a new joint fund, China Dubai Capital.
The fund will focus on China's growing economy in sectors such as infrastructure, health care, and resources and will attempt to capitalize on the growing ties between the UAE and China. Companies with strong growth possibilities and the potential to eventually trade on Dubai national securities markets will be primary recipients of the fund. The first closing of the fund will tag at least $500 million and will close this May. By the final closing expected in October, the fund is expected to reach $1 billion.
First Eastern currently manages over $1.5 billion for direct Chinese investments and is the first Chinese financial company to be established in the Dubai International Financial Center. Dubai International Capital manages Jordan Dubai Capital, a $300 million fund, and plans to launch a fund focused on Saudi Arabia.
$100 per barrel oil is increasing the face amounts of funds being committed. As high oil prices remain, expect more and more from Middle Eastern private equity and sovereign wealth funds to buy up infrastructure projects. That's the new world. If you think this is a big deal for private equity or sovereign wealth funds, check out the Dubai $54 billion proposed eco-project.
3Com Corporation (NASDAQ: COMS) is essentially delaying any material events from coming in the shareholders' meeting scheduled for Friday, March 7, 2008 as it has again delayed the vote on the pending Bain Capital Partners & Huawei merger until Friday, March 21, 2008.
This extra 14 days is to allow 3Com to continue working with Bain Capital Partners to construct alternatives to address concerns raised by the Committee on Foreign Investment in the United States (CFIUS) regarding the pending merger. 3Com does note that there are no assurances that the discussions will not adversely affect the terms of the pending merger transaction.
There has already been an offer on the table that would have resulted in an already lower price, so at a minimum shareholders should already expect that to be a fact. Based upon how this has traded, it seems that the group is just going to be unable to please CFIUS as long as Huawei in China is involved in the deal. It would seem that without Huawei in the deal, the need to acquire 3Com is a far less profitable venture.
3Com hasn't been able to make the magic work, so being overly excited here is a hard task. With shares down 1% today, it sure looks like traders and investors aren't putting too much faith in this merger.
Just when you think private equity is dead, big news break. Reutershas reported that private equity firm Blue Ridge has just raised $1.45 billion for a new private equity fund to invest in Chinese companies. This follows most of its 2006 fund of $300 million being mostly committed.
The Chinese have already taken steps to cool red hot growth in China, but apparently some can still find value there when others might not be able to take advantage of the situation. When you see the U.S. banks and many of the European banks in more and more trouble and with write-downs growing, it is no surprise that newer and previously less-known funds may get their chance to rise. Blue Ridge doesn't have to worry about answering endless questions on things like CDO's, mortgages, credit woes, and the like.
The target sectors are energy, retail, real estate, technology and consumer products. Reuters put the time frame for this fund at five years, which is actually rather short for many "CHINDIA" funds that had been stating 10-year horizons for China and India in the not so distant past. Maybe that is just the new investment climate for you.
On Tuesday, Bain Capital Partners responded to national security concerns regarding its $2.2 billion buyout of 3Com Corp. (NASDAQ: COMS). A detailed article from late yesterday is here from the Associated Press.
Bain and affiliates have offered several proposals to the U.S. government in order to secure its pending buyout. It is unclear if these will secure the merger or not. National security concerns about sensitive military technology lie in the 16.5% stake held by Chinese telecommunications company Huawei due to the inherent close relations with all large Chinese companies and Chinese government.
Bain has asked for a review with CIFIUS, the Committee on Foreign Investment in the United States, to gain approval of the buyout. The shareholder vote is on February 29, 2008, although shareholders are expected to approve the deal. That is a different matter than the pending CIFIUS review.
3Com shares are having their best day perhaps since the buyout deal was even announced last year. Shares are up 8% today to $4.13.
We have noted this and other at-risk mergers earlier. While it is understandable that critical data protection is normal for any government, it is actually somewhat surprising that so much critical government data is passing through 3Com equipment.
The U.S. Congress is nervous about sovereign funds from places like China and the Middle East owning too many U.S. banks and financial companies. Some how these firms are "strategic assets" which need to be guarded.
The Chinese may have found a way around this. They are planning to put $3 billion to $4 billion into a new fund being created by J. C. Flowers, an American LBO firm.
Chrysler currently achieves 90% of its sales from North America, but if the newly private company has its way, it will double its international sales over the next four years as part of its plan to return to profitability.
Rising gasoline prices, declining home values, and general economic malaise have further hurt the company which, along with the rest of the American auto industry, is struggling to compete with lower-cost overseas competitors.
According to The Wall Street Journal (subscription required), "To aid its international-sales expansion, Chrysler boosted the number of products offered overseas to 20 from nine. In China, Chrysler said it is reintroducing Dodge-brand vehicles after a 62-year absence. The Caravan minivan is in production. The Caliber hatchback and Avenger sedan are also slated to be sold in that country."
I wish Chrysler the best of luck because they're going to need it. The same problems that are dogging the company here should be exacerbated overseas -- It's hard to imagine why anyone in China will pony up the extra money to buy a Chrysler when there are so many cheaper options available over there.
Morgan Stanley (NYSE: MS) did worse than most investors thought it would. The investment bank reported income from continuing operations for the fiscal year ended November 30, 2007 of $2,563 million, or $2.37 per diluted share, compared with $6,335 million, or $5.99 per diluted share, a year ago.
The loss from continuing operations for the fourth quarter was $3,588 million, or $3.61 per diluted share, compared with income from continuing operations of $1,982 million, or $1.87 per diluted share, in the fourth quarter of 2006. Net revenues were negative $450 million, compared with $7,849 million in last year's fourth quarter
The part that was hard to swallow was unexpected trouble during November. The firm has an additional $5.7 billion writedown from U.S. subprime and other mortgage related exposures in November in addition to the $3.7 billion writedown it had announced last month as of October 31. This results in a total fourth quarter writedown of approximately $9.4 billion.
This would not happen in the U.S., or most other places for that matter. But, China is China, and the rules there are different. Goldman Sachs (NYSE: GS) "China partner, Fang Fenglei, is moving forward with plans to set up a private-equity fund that could complicate his relationship with Goldman as both hunt for investments in China," according toThe Wall Street Journal. Fang will probably get to keep his title as chairman of the investment banking joint venture, Goldman Sachs Gao Hua Securities.
But why? Feng is about to take dollars out of Goldman's pockets. Feng's new fund will be partners with an investment arm of the Chinese government. Who is going to get first look at the best deal, Goldman or a fund run by the locals? The Journal points out that insiders already have an advantage. "Foreign private-equity investors have found their ability to close deals hampered amid booming Chinese stock prices and mounting concern within China about foreigners buying into important industrial assets."
Yes, the Chinese want to keep the best part of the steak for themselves. It is a closed system, so it can do that. But, Goldman does not have to make it easier.
Douglas A. McIntyre is an editor at 247wallst.com.
According to The Wall Street Journal (subscription required), China made a decision to allow two of its largest investment banks to make equity investments in other companies. In other words, China is clearing the way for Chinese private equity firms, an idea that was effectively banned in 2001.
Earlier this year I wrote that private equity bigwigs see China as the next great opportunity for the industry. The news that American firms may now have to deal with competition for deals from Chinese companies couldn't come at a worse time: Facing widespread called for increased taxes on the industry and a credit crunch, this just adds to the industry's struggle.
And according to The Wall Street Journal, "China's financial system remains flush with liquidity, despite the global credit crunch brought on by problems in the U.S. housing market. Some Chinese officials have grown wary of turning over control of state assets to foreigners. Domestic private-equity funds may represent a key tool for the government to counterbalance an influx of foreign capital."
At the beginning of this year, I wrote that Carlyle Group co-founder David Rubenstein was predicting that emerging markets would see a surge in private equity activity.
While he didn't say that the private equity money would be departing the West for that region, that may be what has happened. According to The New York Times, private equity firms are setting new records with the size of the buyouts funds they are raising for Asian markets: "... investors are expected to commit $25 billion more in the second half of this year to private equity funds in Asia, according to the Center for Asia Private Equity Research. That would be on top of $15.4 billion in fresh capital committed to regional funds in the first half of 2007, a rise of 57 percent over the period a year earlier."
With $35.7 billion in unallocated funds ready to be invested in the region, emerging markets could see private equity fueling a continued bull market. In addition, the confidence of firms like Carlyle, KKR, and TPG should assuage investors' concerns about the region. None of these firms have a reputation for speculative investment, and the rapid growth may be for real this time.
Use ETFConnect.com to find an emerging markets ETF for your portfolio if you don't already have one..
As I posted in June, Blackstone Group's CEO Stephen Schwarzman gave an interview to the Wall Street Journal with a compelling theme -- Schwarzman is the Napoleon of private equity. Napoleon-watch tracks his moves on the business battleground.
The New York Times [registration required] reports that China is not happy its investment in Blackstone (NYSE: BX). Since Blackstone's June 22 IPO, China's $3 billion stake has lost $425 million worth of its value, or 14%.
We may look back on China's investment in Blackstone as a watershed event. Back in the 1980s many Americans were up in arms about the 1989 purchase of Rockefeller Center by a Japanese company -- Mitsubishi Estates Co. That money-losing investment marked the turning point in a decades-long decline in Japan's global ascendancy. While China's Blackstone investment did not cause much uproar here, it may have marked the private equity peak just as the Mitsubishi investment marked a peak in both Japan and New York real estate.
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This week, some of the top veterans in private equity -- TPG's David Bonderman, Carlyle's David Rubenstein, and KKR's George Roberts -- got together at a conference in Hong Kong. And, all in all, it was fairly depressing (hey, I guess that's what happens when you lose billions and billions of dollars).
We're going to resist using a cute Olympic analogy, but the latest 
Last year, the Chinese government 
. He also operates 
Chrysler currently achieves 90% of its sales from North America, but if the newly private company has its way, it will double its international sales over the next four years as part of its plan to return to profitability.
As I 
