Friday Letter Cleaning up the carnage

Wall Street’s institutional meltdown gives private equity players the opportunity to provide aid in more ways than one.  

The scale and scope of the events rocking the world’s public markets this week have caused many to take their head in their hands or cover their mouth with their palm in disbelief – and not just those on the trading floors.

Buyout titans have said publicly the situation is unlike anything they’ve ever seen. However, there’s also a certain amount of calm present in the private equity industry, where nerves are less frazzled than in other corners of the financial world.

This is to do largely, of course, with private equity’s core principle: long-term investment horizons are less susceptible to public market volatility and periods of short-term distress.

But it’s also to do with the opportunities available to cash-flush firms, considering the more than $60 billion (€42 billion) in pure private equity assets that are now in play as a result of the meltdown.

The collapse of Lehman Brothers makes the sale (or spin-out) of all or parts of its investment management division even more imminent. The sale of Merrill Lynch to Bank of America has suddenly put a question mark over its private equity division. And AIG’s new US government owner could indeed decide to unwind the firm’s sizable alternative platform, which is sure to include attractive assets despite the prospect of cumbersome government-run auctions.

Secondaries firms are already rubbing their hands in anticipation – one secondaries specialist told PEO his recent meetings in New York made him feel like “a kid in a candy shop”. And many big buyout shops are reportedly interested in buying the franchises outright.

But private equity is being looked to for more than just its pocket book.

David Zweiner, who joined The Carlyle Group little over a year ago to co-head its nascent financial services group, was selected last week as chief financial officer for struggling US bank Wachovia.

This week, the US government asked Clayton Dubilier & Rice operating partner Edward Liddy to take the helm at AIG. It also selected American Capital director John Koskinen for the board chairman role at troubled mortgage giant Freddie Mac, after having earlier in the month asked Carlyle senior advisor David Moffett to become chief executive.

The situation, while deeply troublesome for the broader economy and consumers, is full of potential for private equity. Just a year ago the industry was constantly being asked to testify at various hearings on either side of the Atlantic to explain its methods amid labour union-fuelled allegations including asset-stripping and job-slashing. And it was being consistently villanised for “exploiting” alleged tax loopholes (such as paying capital gains tax rates on carried interest).

But if this week’s events serve as a harbinger of things to come, the view on Capitol Hill and elsewhere may indeed be changing as private equity is looked to as the “smart money” with heavy hitting operational prowess capable of turning Wall Street around.