Private Equity

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."

If there is one sector that is really hurting despite return chasing in all categories (money being thrown at equities, bonds, and commodities without regard or prudence as Rosenberg has pointed out), it is private equity. Indeed, while credit has thawed in general, investors are still completely shutting out the 5x+ leverage transaction world: the bread and butter of the LBO business model. For a sober look at the desolation in the PE landscape, even as funds rush to raise more billions in dry equity powder which sits at banks collecting 1%, consider that YTD only $33 billion in 654 PE deals has been disclosed a 60% drop from the 1,532 deals done through Q3 in 2008, and not even comparable to the heady days of 2007.

In the environment we're heading into, I prefer liquid asset classes over illiquid ones and I certainly would pick and choose my private equity and real estate funds more carefully instead of writing big checks to every large buyout fund. I'd make sure that my private equity managers are not glorified financial engineers who came from an investment banking background, but guys and gals with solid hands on experience restructuring companies from the bottom-up.

Back in early July, the FDIC submitted a policy statement proposal to establish guidelines for private equity investment in failed financial institutions. At the time we wondered if the proposal wasn't designed to exclude private equity entirely, as the ownership structure and capital requirements (in addition to She Bear's attitude) seemed to rule out the participation of any sane entity that could reasonably consider itself engaged in "private equity."

It The Boston Consulting Group and Nassim Taleb are right, and the latter has been right over the past 2 years where everyone else has been massively wrong, then private equity firms are about to get in line for government bail outs.

The Wall Street Journal reports that HeidelbergCement, whose CDS jumped by about 300 bps since when we wrote about the brewing troubles at the German cement maker, may be bailed out by Goldman Sachs and TPG who are allegedly considering buying

The Wall Street Journal reports that HeidelbergCement, whose CDS jumped by about 300 bps since when we wrote about the brewing troubles at the German cement maker, may be bailed out by Goldman Sachs and TPG who are allegedly considering buying