Friday Letter Speak Up

One of the UK’s most outspoken (and it should be noted, successful) private equity managers once told PEO all successful private equity professionals were psychologically flawed. At the very least, he added, the ones he hired were. For this GP, it was executives with a point to prove that made the difference.  

Playing the pop psychologist for a moment, perhaps this is why the private equity industry has rolled with the punches that have been landing upon it lately. To the hard-bitten deal maker, these recent incidents can be seen as mere skirmishes in a war that’s set to get bigger before it gets smaller. In this context, waiting for the opposition to show themselves fully before responding can seem to make sense tactically.

Yet the punches have come thick and fast in recent weeks, reported by a mainstream media that can barely conceal its delight.

In the US, the Department of Justice is seeking comprehensive information on all “club deals” involving five of the world’s largest private equity firms since 2003 – a sign that the DOJ’s informal probe into alleged collusion in the buyout industry is broader than expected.

People who have seen a letter sent by the DOJ to Carlyle Group, Clayton Dubilier & Rice, Kohlberg Kravis Roberts, Merrill Lynch and Silver Lake Partners, said it requested a list of all the documents related to consortium deals since January 2003. The authorities are believed to be seeking e-mail communications too.

Meanwhile according to rating agency Standard & Poor’s, the quality of debt backing private equity deals in Europe has fallen dramatically. Their research this week shows that at the end of August the loans backing three-quarters of European private equity deals were rated in the single “B” range of junk debt. This means there is a one in five chance of the companies using the loans falling into default.

A European central banker also warned on Tuesday this week that European banks’ lending to highly leveraged financial firms, such as hedge funds and private equity houses, posed fresh risks to financial stability. Edgar Meister, chairman of the European Central Bank’s banking supervision committee, said that intense competition among banks may have contributed to an erosion of standards.

And then there was the curious phenomenon of the UK’s Financial Services Authority’s discussion paper on the risks posed by private equity and the need for regulatory engagement. If the private equity industry felt under siege before, then the headlines which greeted this paper only served to confirm the buyout firms’ role as bogeyman, number one.

In fact, the FSA paper broadly endorsed the private equity model, recommended a few, far from onerous enhancements to the regulatory regime and invited discussion. The industry welcomed the opportunity. Interestingly, the FSA did not consider “club deals”, the focus of US Department of Justice interest, to be worth mentioning. Most mainstream media though preferred to highlight its conclusion that a large buyout failure or a cluster of smaller ones was “increasingly inevitable”.

Of course depending on how the FSA defines a cluster, the inevitable has probably already happened. At least half a dozen small buyouts have gone to the wall already this year and many more have had their banking terms renegotiated to stave off a breach of covenants.

So as this public scrutiny of private equity intensified, one prominent industry figure stepped into the fray this week. David Bonderman, founder of the Texas Pacific Group, chose this moment to launch a fight back for the industry via the pages of the Financial Times.

Bonderman’s straight-talking was a breath of fresh air. So the industry sacks people in Germany? Well not as many as the inefficient German corporates. Everyone knows the industry makes a lot of money for its investors and itself. Well so do the big corporates. Why can’t the industry raise big funds? Other asset managers do and nobody grumbles.

Bonderman’s intervention is telling. Such is the cacophony among the media and – arguably a concomitant to this – the uneasy curiosity about the asset class among regulators, actions no longer speak louder than words.  It is not enough for the industry to press on with business and let the results do the work. Waiting for the opposition to reveal themselves fully should not be used to justify silence – or disdain. More leading figures in the industry need to speak up now.