bloggingbuyouts

As usual, private equity funds are getting creative in dealing with the challenging times. In fact, there are signs of a pick-up in the space, according to an in-depth piece in TheDeal.

Let's face it, private equity was a big engine of fees for Wall Street. For example, last year Goldman Sachs (NYSE: GS) snagged $1.5 billion in advisory fees for such deals.

But, as of now, the fee machine has come to a near halt. In fact, investment banking fees from private equity sponsors have plunged a staggering 77% in the first quarter of this year.

So, what to do? Well, interestingly enough, private equity firms are thinking small. That is, the deal size is likely to range from $1 billion to $2 billion. Such deals are much easier to pull off when there is a credit squeeze.

What's more, Wall Street will look at advisory assignments for sovereign wealth funds, which are starting to take on private-equity style of deals. Oh, and we'll see lots of growth in dealmaking in Asia and the Middle East.

All in all, these are positives. However, it really doesn't replace the highly lucrative fees for private equity transactions.

Basically, to see bigger buyout activity, there will need to be a return of collateralized loan obligations (CLOs). Unfortunately, it's something that hasn't happened so far -- and is not likely to return until banks repair their balance sheets and get more comfortable taking on increased risk.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

What do I do to make you want me
What have I got to do to be heard
What do I say when it's all over
And sorry seems to be the hardest word

-- Elton John and Bernie Taupin

Hedge fund investors are getting a taste of just how hard it is to say sorry this week. According to The Wall Street Journal, hedge funds are sending letters to their shareholders with explanations for the huge draw-downs: other hedge funds (crowded trades), computer models, once-in-a-blue-moon aberrations, etc.

Be sure to read the piece in The Journal for some wonderful examples of slippery wordsmithing. Yes, their job was to make money for investors, and they expect to be rewarded handsomely if they succeed. But if they lose money? Why, don't blame them! This appears to be a case of "Heads I win, tails is bad luck" in action.

Suppose the not-my-fault hedge fund managers are right. Maybe it isn't their fault. But if they aren't responsible for bad times, do they really deserve the huge performance fees they earn when it goes well?

Bloomberg News reports that private equity is on track for a record year of fees paid to Wall Street. LBO firms paid investment banks $8.4 billion during the first half of 2007, putting the buyout industry on pace to exceed 2006's $12.8 billion. If the current pace continues -- and that's a big if given the financing challenges it has been facing -- LBO firms would pay $16.8 billion to Wall Street by the end of 2007, a 31% increase over 2006.

Who's paying the fees? Here are the top four:

• Blackstone Group LP (NYSE: BX): $685.4 million
• KKR: $334.8 million
• Apollo Management LP: $407.5 million
• CVC Capital Partners Ltd.: $309.1 million

And who's getting them? These five banks profited the most:

• Goldman Sachs Group Inc. (NYSE: GS): Goldman, which has a $20 billion fund, actually paid out fees of $250.1 million for advice on LBOs while also leading the pack in earning fees from other LBO funds. Goldman took in $790 million in fees for helping arrange deals for companies. It's not clear to me why Goldman didn't use its own people to advise its LBO funds and saved that $250 million.
• JP Morgan Chase & Co. (NYSE: JPM): second-most fees from LBO firms.
• Credit Suisse Group was third.
• Frankfurt's Deutsche Bank AG (NYSE: DB) was fourth
• Citigroup Inc. (NYSE: C) was fifth

What's been driving these fees is takeovers by LBO firms totaling $670 billion in the first half of 2007, more than double the same period in 2006. With financing difficulties, it remains to be seen whether the party will continue. And if it does not, what will the banks do to make up the difference? The answer to that question is above my pay grade.

Peter Cohan is president of Peter S. Cohan & Associates,. He also teaches management at Babson College and edits The Cohan Letter. Of the securities mentioned, he owns Citigroup stock.