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

Tyler Durden's picture




 

One sometimes wonders why the idiots in Washington have still not bailed out the private equity industry. After all, for the low, low price of about $100 billion (which is about how much keeping Fannie on life support will cost US taxpayers in the first quarter of 2010 alone), Congress can ensure that thousands of PE associates, VPs and MDs can once again frequent Hustler Club, order dozens of bottles of Cristal at Lotus, and eat sushi straight off geisha bodies at Bar Masa. In other words, a return to those oh so difficult days of 2007. Furthermore, looking at the track record of PE, especially as characterized by its 10 largest deals in history, one can make the mistake that KKR, Apollo, Bain, Carlyle and Providence are all employing exclusively government workers: therefore the government would in essence be bailing out itself. 

For those who are interested in more information, Moody's has compiled a useful report, entitled "$640 billion & 640 days later: how companies sponsored by big private equity have performed during the U.S. recession." The track record is simply abysmal: Of the top 10 deals, only Hertz, HCA and First Data are considered "stable" which is actually saying a lot ("stable" by Moody's means these firms are likely about to have an alien burst out of their ribcage). For fear of being sued with impunity by the benevolent IR team at Hertz we won't say much, save to say that the firm is exclusively reliant on a stable economy, healthy business travel, vibrant tourism and the lack of default of fleet car makers, and which is leveraged up its colon in double digit leverage multiples. Also, saying HCA and FDC are "stable" in public and one risks being involuntarily committed. Therefore one can say that virtually all of the blockbuster LBO deals are on the verge of collapse/bankruptcy/default/insolvency, etc. If that is not deserving of communist handouts courtesy of Comrade Obama, nothing is.

And while these companies life expectations are limited at best, regardless of how Hertz' lawsuit against anyone who has a sell rating against the firm goes, the biggest threat is to the entire PE industry, which just like the CRE space, will be facing a massive refi threat into 2014. Between 2011 and 2014, there is roughly half a trillion in LBO debt maturing. Add that to the $1.5 trillion in bank debt due for rolling, and the roughly $3 trillion in CRE debt that is also supposed to be refinanced, and one can see how the next president will have his arms full as he/she will need to find a way to roll about $5 trillion in debt without the benefit of securitizations. Furthermore, since the economy will be on stimulus #10 by then courtesy of a drunk with power Obama, America will be on fast track to sovereign and corporate Armageddon.

Anyway, here is the chart that shows the upcoming debt maturities:

And since no Zero Hedge post is complete without ridiculing someone away from the Administration or the Fed (the last two are like shooting fish in an excess liquidity barrel), here is the rating of the worst of the worst PE firms. Not surprisingly, Cerberus is the worst PE firm in the history of the universe, followed promptly by Leon Black's Apollo, of whose 20 deals initiated before 2008, 5 are in distressed and 8 are in default. Hey Calpers, how is that evaluation of your Apollo relationship going?

And as we are confident that the White House will be all over this to find their next bail out target (those $1.1 trillion in excess reserves have to hit the money in circulation somehow), we will present you will the full Moody's report. If, in addition to this, our dear White House readers are in need of reading, comprehension and math lessons, those can be purchased at our Paper Street headquarters: we accept compensation in the form of perpetual, non-accruing, non-PIKing TLGP zeros.

 

 

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Fri, 11/06/2009 - 20:45 | 123098 Miles Kendig
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

Fri, 11/06/2009 - 20:53 | 123104 casino capitalism
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.

Fri, 11/06/2009 - 20:53 | 123105 Anal_yst
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. 

Fri, 11/06/2009 - 20:58 | 123110 Miles Kendig
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

Fri, 11/06/2009 - 20:56 | 123107 Anonymous
Anonymous's picture

Best post of the day, Tyler.

Fri, 11/06/2009 - 23:22 | 123197 Anonymous
Anonymous's picture

Agree, better than gold talking.

Fri, 11/06/2009 - 20:57 | 123109 chet
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.

Fri, 11/06/2009 - 21:22 | 123124 Anonymous
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! ♫

http://www.oneinchpunch.net/wordpress/wp-content/uploads/2007/06/plush-g...

Fri, 11/06/2009 - 21:24 | 123126 Anonymous
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)

Sat, 11/07/2009 - 08:48 | 123373 Catullus
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. 

Fri, 11/06/2009 - 21:36 | 123134 RobotTrader
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.

Fri, 11/06/2009 - 22:19 | 123159 sgt_doom
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.

Fri, 11/06/2009 - 21:53 | 123145 Fish Gone Bad
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.

Fri, 11/06/2009 - 22:14 | 123156 Mark Beck
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.

Sat, 11/07/2009 - 07:18 | 123355 Anonymous
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.

Ferrofluid

Fri, 11/06/2009 - 22:28 | 123164 Handle with care
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.

Sat, 11/07/2009 - 00:11 | 123225 Anonymous
Anonymous's picture

What?????

Sat, 11/07/2009 - 08:14 | 123364 Handle with care
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

Sun, 11/08/2009 - 01:36 | 123751 Brett in Manhattan
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.

Fri, 11/06/2009 - 22:32 | 123165 Anonymous
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.

Fri, 11/06/2009 - 23:40 | 123209 Anonymous
Anonymous's picture

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

Sat, 11/07/2009 - 00:34 | 123240 spekulatn
spekulatn's picture

Great stuff T.D.

 

"MARK IT ZERO, DUDE"

Sat, 11/07/2009 - 10:32 | 123402 alexdg
alexdg's picture

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

Sun, 11/08/2009 - 01:41 | 123755 Brett in Manhattan
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.

Sat, 11/07/2009 - 13:29 | 123475 Rainman
Rainman's picture

CalPers + Appollo = Dynamite + Fuse

Just waiting for the match.

Mon, 11/09/2009 - 11:30 | 124622 Anonymous
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.

Thu, 02/04/2010 - 15:53 | 217626 satiagraha
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.

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