Lately, Bain founder and GOP presidential candidate Mitt Romney has found himself in a spirited defense of the private equity industry, doing all he can to spin decades of data which confirm, without failure, that PE Leveraged Buy Outs are nothing but "efficiency maximizing" transactions whose only goal is the "maximization" of EBITDA in the pursuit of dividend recap deals, IPOs or outright sales, while loading up the company with untenable amounts of leverage. All this with a 3-5 year investment horizon, which ignores the long-term viability of a company and seeks to streamline (read fire as many as possible) operations as quickly as possible in the goal of maximizing short-term returns. We wish him luck in his endeavor. As for the other side of the equation, we recreate a post we penned back in November 2009 which analyzes just how effective the mega-LBOs have been for the economy, and the workers involved. In other words - the facts. In a nutshell, here they are: "The Disastrous Performance Of Private Equity: Of The Top 10 LBOs, 6 Are In Distress, 4 Have Defaulted." Read on for the full details.
From November 6, 2009
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.