A recent article out of The Economist that was featured on CFO.com this morning, "The Comeback of Private Equity," discusses that private equity firms could be an uncertain remedy for the credit crunch.
The private equity industry possesses two main characteristics as of late. First, huge leveraged buyouts are being replaced with purchases at distressed prices with less leverage. The second private equity factor lies in the fact that these companies have a lot of cash and capital to spend. With all this capital and all the distressed debt, private equity firms can buy loads of debt at low prices.
TPG has just gone after a major finance deal and The Carlyle Group recently closed a $1.4 billion fund that capitalized on low prices. TPG, Blackstone and Apollo are currently negotiating with Citi to pick up $12 billion in frozen loan off their balance sheet. Yet another example-Apollo, a firm with a historical focus on distressed debt, plans to go public.
While this shift in the market may help alleviate some of the credit crisis and earn private equity some returns, the jury is still out. Some regulators are wary of this new trend in private equity, wondering who will run the banks.
The article also points out that the true value of a private equity firm depends on its ability to improve portfolio company performance, not in "working magic" for financial institutions.
While I agree on the verdict still being out, this is actually a relief to see. Frankly, the cash has to be put somewhere and the good news is the debt markets have thrown out the baby with the bathwater. There will be real winners and real losers in this. There always are. But this will kick back a steady flow of funds or will at some point, and those funds will either be paid to partner/client groups or will be used to fund investments when a better climate is present. We won't be seeing any major club deals like we used to for $10 billion and $20 billion or more.
Someone has to act as a vulture. The issue always boils down to "at what price is this worth the risk?".
The private equity industry possesses two main characteristics as of late. First, huge leveraged buyouts are being replaced with purchases at distressed prices with less leverage. The second private equity factor lies in the fact that these companies have a lot of cash and capital to spend. With all this capital and all the distressed debt, private equity firms can buy loads of debt at low prices.
TPG has just gone after a major finance deal and The Carlyle Group recently closed a $1.4 billion fund that capitalized on low prices. TPG, Blackstone and Apollo are currently negotiating with Citi to pick up $12 billion in frozen loan off their balance sheet. Yet another example-Apollo, a firm with a historical focus on distressed debt, plans to go public.
While this shift in the market may help alleviate some of the credit crisis and earn private equity some returns, the jury is still out. Some regulators are wary of this new trend in private equity, wondering who will run the banks.
The article also points out that the true value of a private equity firm depends on its ability to improve portfolio company performance, not in "working magic" for financial institutions.
While I agree on the verdict still being out, this is actually a relief to see. Frankly, the cash has to be put somewhere and the good news is the debt markets have thrown out the baby with the bathwater. There will be real winners and real losers in this. There always are. But this will kick back a steady flow of funds or will at some point, and those funds will either be paid to partner/client groups or will be used to fund investments when a better climate is present. We won't be seeing any major club deals like we used to for $10 billion and $20 billion or more.
Someone has to act as a vulture. The issue always boils down to "at what price is this worth the risk?".
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