Return of the Golden Age? Actually... No.

Almost a month ago to the day, Silver Lake Co-CEO Glenn Hutchins revived an only briefly lost concept: The "Golden Age of Private Equity," with a quip to Reuters that “the financial markets may be on the cusp of a new ‘golden age’ for private equity...."  You needed only go to the Private Equity Analyst Conference a bit before to find that Benjamin Jenkins of Blackstone was caught pronouncing "private equity can thrive in the new world order," around the same time David Rubenstein chimed in with "...we're back."

One could be forgiven a modicum of confusion, for it seems that the "Golden Age of Private Equity" spans the period from before the boom times as may have been seen in 2004-2008 through the center of the present recession and through all points that may lie between.  A bit of reflection, however, will quickly reveal the ambiguity to be the result of the newly mercurial nature of Private Equity's definition, not the discovery of some new and uber-bullish asset class for all seasons.  A simple modification of the term's entry in Webster's probably wasn't what Rubenstein had in mind by "...the industry is reshaping itself or reinventing itself," but it should have been.

It wasn't all that long ago when Private Equity was about acquiring downtrodden firms, pulling many of them out of the necessarily short-term pressures of the public markets, carving out the deadwood, imposing crushing fiscal discipline through the application (mostly judicious) of debt, and slowly going about re-crafting these enterprises into something like promising concerns once more.  The practice of Private Equity involved more operational excellence than financial engineering prowess.  Alas, those days, the true "Golden Era" of Private Equity, seem long gone.  I suspect Private Equity has taken on a new meaning.  Bert Dohmen's "Wellington Letter" this week hits on it perfectly:

Remember, that was one of our important "canaries in the mine" in 2007, when a major P-E firm hastily went public, grabbing around $4.5 billion of the public's money. The stock imploded thereafter. Our reaction to IPO's that fail is, when Wall Street is eager to sell you something, pretend you're in a used car lot: be suspicious!

So what shall we make of the host of new Private Equity sponsored IPOs making the rounds?  Probably that a lot of struggling partnerships are quite eager to dump the debt laden hulks they acquired at 9 and 10 times EBITDA onto the public for whatever they might get and before things go south again.

All hail the new Golden Age! (Oh, and load up on puts).

Comments

[AR]

Prive Equity Performance  /  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.

[Green Sharts]

I also read in the last day or two that Rubenstein said the industry probably should change its name from private equity to "change capital" or "value-added equity". The old "lipstick on a pig" strategy, employed previously by these obscenely paid douchebags when the term "leveraged buyout" became about as well received in polite company as a turd in a fruit bowl.

[Cognitive Dissonance]

"It wasn't all that long ago when Private Equity was about acquiring downtrodden firms, pulling many of them out of the necessarily short-term pressures of the public markets, carving out the deadwood, imposing crushing fiscal discipline through the application (mostly judicious) of debt, and slowly going about re-crafting these enterprises into something like promising concerns once more.  The practice of Private Equity involved more operational excellence than financial engineering prowess.  Alas, those days, the true "Golden Era" of Private Equity, seem long gone."

Well said Marla. Once upon a time, it was all about bringing value back to a company someone prior to you screwed up. Now it's all about screwing up what someone prior to you brought value to.

BTW, your Sunday morning radioZ put "Orbital The Box" in my head all week. I finally broke down and bought it so I could at least listen to how it really is rather than how I remembered it from your session.

[ozziindaus]

when Wall Street is eager to sell you something, pretend you're shoe laces are undone.

P-E confidence was lost after the GM and Chrysler bond honder rapings

[alien-IQ]

First of all: Yes, I've load up on puts and the STT 45 puts I grabbed Tuesday morning are already quite nice. But another little thing I came across about the new "Golden Age" was quite amazing. How Paulson gave Goldman the Lehman heads-up. http://blogs.reuters.com/felix-salmon/2009/10/21/how-paulson-gave-goldma... Paulson MUST go to jail.

[Anonymous]

Coming soon to the nearest mall (or appt complex) to you:the new landlord
http://uk.reuters.com/article/idUSTRE59K01420091021

[quant-this]

I think your view of private equity firms is quite romantic. Yes, there are the Invuses of the world doing some good things but I'm pretty sure PE is just a front for lawyers and investment banker to suck out fees out of both investors and portfolio companies. It's amazing to see that somehow deals go awfully sour yet the firms themselves make a mint as they charge LP's performance fees, take that money give it to a firm and charge investment banking fees for raising the money. There is just so you can go on doing financial engineering without adding any real value. But hey at least you get to throw $3m wonderbashes for your birthday (btw, was talking to a partner at Carlyle that was so pissed about that because he thought that the government would start considering carried interest as regular income - but silly PE person, why do that, let's get back at the Schwartzman's of the world by raising taxes for those that make more than $200k a year).

[brodix]

I certainly agree there. "Stodgy old management" usually just meant they had some cash reserves that were not leveraged to the max. I suspect Marla was in elementary school in the eighties.

[kaptainkrunch]

You cant tell me that this article couldn't be about a CEO on wall-street. The similarities are ridiculous.  Besides the killing part..well maybe not..          http://www.cnn.com/2009/CRIME/10/21/mogilevich.fbi.most.wanted/index.htm...  

[Leo Kolivakis]

Couldn't agree with you more Marla. I wrote about 'PE on the cusp of a golden age' and warn LPs to be very careful with illiquid asset classes like private equity and real estate. If you're betting on inflation, they'll survive, but if deflation develops, these asset classes face a lost decade.

[Anonymous]

The golden age at the time of those comments, hindsight will reveal, was not happening in private equity but in distressed debt investing. And naturally the fattest pickings will have been the debt backing... LBO--- i mean private equity deals.

[Leo Kolivakis]

There is plenty of money sloshing around for private equity. Invest AD, an investment firm owned by the Abu Dhabi Government, plans to launch a US$400 million (Dh1.47 billion) private equity fund to take stakes in companies across the region:

The Invest AD Private Equity Partners II fund will acquire stakes in as many as 12 firms in countries potentially including Egypt, Turkey, Saudi Arabia and the UAE, said Samir Assaad, the head of private equity at Invest AD.

The fund’s launch comes as welcome news to an industry that has seen deal-making in the region grind to a virtual standstill. While more than $3bn worth of private equity deals were done in the Middle East in 2007, according to one estimate, that total declined to about $500m last year. Only a few deals have been announced so far this year.

Now, however, was an ideal time to raise money and invest, Mr Assaad said, because deals could be done at prices depressed by the global economic downturn.

“A lot of people say it’s a very difficult time,” Mr Assaad said. “But when you look at historical returns of private equity funds, there’s very clear evidence that some of the best vintage years have been for funds raised during the down times and during recessions.”

The company’s government backing and connections could help it raise funds during a challenging period for the private equity industry. While many independent players face a difficult environment, Invest AD has a strong reputation and access to a large pool of capital.

“They obviously have the right backers and if they have the right team, they are probably as well placed as anybody,” said one private equity analyst who requested anonymity. “Being [Invest AD] they’ll have access to a lot of opportunities that aren’t available to other players.”

The new fund will be seeded with the firm’s own money and a first close on fund-raising is expected in the first half of next year, when the company hopes to have commitments for better than half of the $400m fund-raising target.

While the firm expects more than 50 per cent of the funds to come from Gulf investors, it also has attracted interest from institutions in Asia and may court additional investors from Europe and the US.

I hope they know what they're doing. Historical returns are misleading and if you rely purely on them, you're in for a nasty surprise.

[Leo Kolivakis]

Reuters announced that TPG to return $20 million in fund fees:

TPG to return $20 million in fund fees: source Thu Oct 22, 2009 11:58am EDT

NEW YORK (Reuters) - Private equity firm TPG has told investors that it plans to return $20 million in fees paid on its $19 billion buyout fund, a source familiar with the situation said on Wednesday.

The firm told investors about its plans, reported earlier by the Wall Street Journal, at its annual conference this week, the source said.

"We took this proactive step in order to share the economic cost of a deal market that has been slower than anyone anticipated," the WSJ quoted James Coulter, co-founder of TPG, saying.

TPG could not be immediately reached for comment by Reuters.

Private equity firms have had a tough time finding new investments since the credit crisis shut off the availability of easy financing.

They have also struggled to keep investments healthy as the economy suffered. Fundraising for new funds has also become very difficult, as investors have been hard hit by the slump in global equity markets.

Investors originally committed about $20 billion to the TPG VI fund, but TPG later allowed them to reduce their commitments, a source told Reuters in December, which brought the size down to about $19 billion. TPG, formerly Texas Pacific Group, is one of the largest private equity firms in the world.

Its founding partner, David Bonderman, is considered one of the most influential figures in the U.S. private equity industry.

Hint: Bonderman isn't returning $20 million in fund fees because he sees a "golden age in PE".

[Sigma O]

"Private Equity was about [...] imposing crushing fiscal discipline through the application (mostly judicious) of debt"

Is there any evidence that this debt discipline actually improved the performance of the companies, rather than simply being an artefact of how they were acquired?