The Disastrous Performance Of Private Equity: Of The Top 10 LBOs, 6 Are In Distress, 4 Have Defaulted

Tyler Durden's picture

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Miles Kendig's picture

For change we can believe in we could always put Bain in the Oval Office.... after all we had the chance last time. heh

casino capitalism's picture

I saw first hand a lot of LBO deals presented by our bankers at the bank I worked at and I can honestly say private equity is the bloodsuckers of corporate america (unbeleivably, even more than the banksters).  They take perfectly healthy going concerns, lever them to the stratosphere, strip out as much as they can into their pockets and leave an over-levered disaster.  If Washington ever gets honest and takes on wall street, they should throw the private equity scumbags in jail at the same time.

Anal_yst's picture

Didn't realize cerberus only did 6 deals pre '08, nice work brosephers.  Interesting to note that of the 44 deals in the study where the firms paid a dividend to the sponsor, fewer are in default/distress than the overall sample. 

Miles Kendig's picture

Interesting to note that of the 44 deals in the study where the firms paid a dividend to the sponsor, fewer are in default/distress than the overall sample.

Great catch

Anonymous's picture

Best post of the day, Tyler.

Anonymous's picture

Agree, better than gold talking.

chet's picture

Gosh!  I hope those poor put-upon private equity barons were able to suck their "special management payment" out of their flailing victims before the bodies cooled.

Oh, won't someone think of the private equity guys?  They're just a bunch of defenseless Bambis.  Never mistreated a person or destroyed any value in their lives.

Anonymous's picture

(Sung to Amy Winehouse's – Rehab)

♫ They told the squid to give back the geisha's and he said no, no, no! ♫

Anonymous's picture

i don't see what's so scary about debt maturities 3-5 years from now. ok, they will owe $160B dollars in 5 years. impossible to roll over? well, what if it was 160B not dollars, but quarters? Piece of cake! (and we'll be lucky if in 2014 1 US dollar will have purchasing power of today's 25 cents.) isn't that what Geithner, Bernanke LLC are trying to accomplish? Devalues the buck so much, that the "toxic" assets won't have to be written down (in nominal dollars)

Catullus's picture

Take Energy Future Holdings as an example.  They have a little over $42 billion in debt, $22 billion of which is set to expire in 2014.  That $22 billion is owed by a ringfenced company called Texas Competitive Electric Holdings (TCEH) which comprises of wholesaler Luminant and retailer TXU.  The other $20 billion is owed by a company called Oncor, a wires and polls company (B- rating, regulated profits, solid company).  EBITDA for TCEH is $1 billion annually.  So... someone has to want to rollover $20 billion in debt on or before 2014 when they only make $1 billion in EBITDA.  At 10% interest, they wouldn't even be able to pay the note (which for a CCC rated company sounds about right).  To this point they're remaining above water by exercising PIK features on their higher interest debt. 

What I find interesting about the EFH debt exchange is the waiver of change of ownership provisions.  You not only take a 60% haircut on the bond, you also get subordinated on being able to block the sale of property.  This is not an issue of print more money and the problem will go away. 

RobotTrader's picture

Private equity and LBO deals are dead.

The smart money will only invest in items which can be sold via a mouseclick within seconds if something goes wrong:  Stocks and bonds.

sgt_doom's picture

I sincerely hope you are correct, as those PE LBO deals are interwoven with those 80% of pension fund investments (re: pension funds with $5 billion or greater in assets) and built upon those houses of sand known as CFOs (collateralized fund obligations), CLOs, and the occasional CDOs, while ye old "risk removal" in the form of the usual CDSes.

And as others have said, the damage done to the economy, employment, the tax base by PE LBOs (especially Blackstone Group, KKR, Carlyle Group, Citadel, etc.) is incalculable.

They deserved to be first castrated, then waterlogged.

Fish Gone Bad's picture

I really felt left out of FreeScale.  Now that they are in trouble, I do not feel so left out.

Mark Beck's picture

Freescale is a tragic example of L-o-BO-tomy cost cutting in high technology. It takes time and a lot of investment to establish high technology engineering teams that can compete and innovate. When you try and out-source your product development brain trust, you effectively rip the heart out of the company. Rest in peace.

Anonymous's picture

Outsourcing enables idiot managers to take over technical departments, it requires almost zero skill, and the end results proves this time and time again.


Handle with care's picture

So it seems that much of the financial industry had its only function to destroy the real economy in return for siphoning out money to put in the pockets of the few who were running it at the expense of everyone else.

In the future, innovation in the financial industry will be viewed in the same way as a mutation in the influenza virus.

Handle with care's picture

I mean whenever some hotshot comes up with some financial "innovation" the world will recognise it as dangerous to the real and healthy economy and act to quarantine it and prevent it spreading to infect healthy and productive businesses

Just like when the influenza virus mutates and produces some genetic "innovation"

Virtually every financial innovation over the last 30 years has been nothing but a scam to siphon money out of the productive sector and into the pockets of those working in the financial sector.

It used to be a relatively harmless amount that didn't affect the host, but now its life threatening and any further infections by new strains that threaten to spread rapidly must be stopped from spreading to allow the fragile real economy a chance to recover and become healthy and strong again.

I mean look at the latest, allowing banks to mark underwater CRE loans at par. Every new idea that comes from these financial wizards is a disease that weakens and sickens the real economy and must be stopped from spreading

Brett in Manhattan's picture

Probably not. By the time the next crisis hits, there will be a new generation of sucker who will take the bait.

Plus, you'll have the financial media trumpeting the "This time it will be different" mantra.

Anonymous's picture

This doesn't even begin to assess the performance of big private equity players from the only perspective that interests them, i.e. how well have their managing partners done?

In many situations the opportunity to restructure a deal means they get to squeeze out a bunch of upside of all over again, when they have already recovered most or all of their actual up front investment.

Anonymous's picture

Anyone knows how did Carlyle come out from the Freescale deal?

spekulatn's picture

Great stuff T.D.



alexdg's picture

I actually own stock of Blackstone... down 36%, on the old buy and hosed strategy.

Brett in Manhattan's picture

I remember the Blackstone IPO. Some tool on CNBC said that the stock would double the first day of trading.

What actually happened was that insiders shorted the hell out of the stock until they killed demand, then lowered it.

Rainman's picture

CalPers + Appollo = Dynamite + Fuse

Just waiting for the match.

Anonymous's picture

Some research on the returns for Private Equity / Read the article profiling Leon Black (Apollo Partners) in the February 11th, 2009 issue of Portfolio magazine (not defunct). Essentially, private equity makes money for one group -- their founders and senior principals. Everyone else invested like pensions, insurance, endowments, etc. -- pays exorbinant fees to be part of "their elite game and group." Is private equity really smarter? Doubt it. This from a study referenced in the article: European academics, Ludovic Phalippou and Oliver Gottschlag, demonstrated in a paper that the poor performance of private equity firms could be understated. When private equity firms report the value of their funds, they include estimated values of deals before the investments are actually realized through a sale or share offering. Surprise, surprise: Those estimates tend to be biased upward. When the data is cleaned up, Phalippou and Gottschlag found, it becomes clear that the private equity industry tended to underperform the S&P 500 by three percentage points a year after fees. Also from the artcle: After fees, private equity firms as a whole don’t beat the market. University of Chicago scholar Steven Kaplan studied the industry’s returns and in a 2005 paper reported that over a period of about three decades, the average private equity firm’s annual return was no better than that of Standard & Poor’s 500-stock index.

satiagraha's picture

Cerberus is a distressed debt firm with very little experience in private equity. Thus, their results are not surprising. Same is true for Apollo.

In any case, this is a great post. Thank you for sharing.