PE firms after the credit crisis - chic or brawny?

Whatever happened to the large $100 billion plus “club” deals that PE funds were talking about? With the credit markets drying up, the only constant is the high valuation expectation of sellers.

The consensus seems to be that rising cost of capital will reduce asset prices and the diminished role of securitized debt will influence PE buyouts. In this turmoil, there is also the dilemma that what constitutes “change in material terms” that might trigger a break-up fee (a charge on the seller if he walks away from the deal before it is closed). Could that be a 10% drop in earnings? How about reverse (a charge on the buyer) break-up fee? Well, those are some of the issues the industry (and some Courts) is now wrestling with.

So it calls for PE firms to build up in-house operating expertise besides fundraising skills. Return to fundamentals would mean facilitating exits through walking with portfolio firms during times of distress, handholding managements to weather market cycles and help consolidate market share and preserve earnings growth. Leveraged buyout / taking private financing will give way to operational financing that helps companies ride out short term liquidity imbalances.

When PE firms came to India, initially they were mostly IT/Telecom focused. Then the sector became over crowded and their focus blurred and soon they embraced sector agnosticism. Now it is the same PE firm that invests in IT, Real Estate, Aviation, Financial Services, Gems & Jewellery and Pharmaceuticals. My question - will they continue to look like lean, chic fund houses (operating from boutique hotels), with just one or two General Partners and a few analysts (sharing the fees and carry) or soon will they resemble a barrel chested, square jawed corporation from outside, sweating it out all the more?

Significantly more meaningful work than having to just spend hours shuffling management deck or reading research reports ;)
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Amazing place, Wall Street!

After taking a $9.4 billion write down, John Mack of Morgan Stanley feels the US financial crisis is getting close to its bottom. As a strategic measure, Mack also vowed Morgan Stanley would “keep its powder dry” and steer clear of large acquisitions to preserve capital and liquidity. He expects the turmoil to stretch thro a couple quarters ahead.

Meanwhile Citigroup is nearing a deal to sell $12bn in leveraged loans at a discount to a group of leading private equity firms, marking another step in new chief executive Vikram Pandit’s efforts to shrink the beleaguered bank’s balance sheet. Although details of the deal were still being worked out, people familiar with the matter said Apollo Management, the Blackstone group and TPG would buy the loan portfolio at a discount that could come in at about 90 cents on the dollar.

The Citi portfolio includes loans used to finance acquisitions by Apollo, Blackstone and TPG, as well as debt in their rivals’ deals. Apollo would buy about half the portfolio, with Blackstone and TPG taking the rest.

Isn’t that terrific? When times are good, PE firms go ahead and raise leveraged debt from banks. When the banks go bust, they turn around and buy distressed debt including some of their own. Wall Street is full of surprises!

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Prize catch

Inelegant exhibition of private wealth meets with public scorn as it’s often a thin border between finesse and gaucherie. Jealousy is instant though never admitted except in the form of paraded altruism. If it involves an industry that epitomizes ruthlessness and barbaric greed like Private Equity, it becomes indefensible.

One really feels bad for Stephen A. Schwarzman, the poor little rich guy. He just happened to be the czar of Blackstone group, and had developed a taste for $400 crabs that he ordered regularly. What’s the big deal? You eat $50 hot dog because you draw $ 100 k package. With a compensation of $400 m, is it not par for the course? May be he likes to host $5m birthday parties – can you blame him for bringing his industry into disrepute for that? Too bad. That's no reason why Congress suddenly wants to double the taxes paid by rich guys like him.

“Don’t worry Mr.Schwarzman. You are not alone. David Bonderman of Texas Pacific group has outmillioned you by notching up a bill of $ 7 million on his shindig.”

Senator Charles E. Grassley (R)-Iowa, is certainly jealous. He introduced the now famous “Blackstone Bill” - aimed at taxing carried interest of PE executives at the same rate (35%) as normal income as against 15% (capital gains) earlier. Some call it the Birthday Party Bill.

BTW, that $400 crab - is it the same crustacean they’re talking about? I guess so…

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