News analysis: Geithner’s plan

David Snow examines what America’s Public-Private Investment Program for troubled assets means for private equity.

The US' newly unveiled Public-Private Investment Program (PPIP) is an ambitious, audacious attempt to sit private capital at the same table as the US government and try to jointly digest assets known to have caused mass poisoning. 

In its current form, however, PPIP may not have much for under-employed LBO professionals to get excited about, focused as it is primarily on real estate loans and related securities. But it signals something important from the Obama administration – an acknowledgement that private capital needs to play a central role in fixing a disaster of capitalism’s own doing. This approach may inform future government programmes focused on banks, infrastructure and possibly leveraged loans.

Timothy
Geithner

PPIP will set aside as much as $1 trillion to “maximise the impact of each taxpayer dollar” spent trying to jump-start the economy, according to the Treasury, led by Timothy Geithner. It divides the universe of troubled assets in to two broad types: real estate loans and securities backed by real estate loans, which Treasury calls “legacy loans” and “legacy securities”, respectively.

Almost anyone is invited to snap up legacy loans. The legacy securities programme, on the other hand, will be limited to possibly only five major US asset managers who can prove expertise with these kinds of assets – identified specifically as RMBS, CMBS and ABS securities originally rated triple-A. In other words, if you’re an expert at valuing and managing real estate loans, this PPIP’s for you. If you’re a GP who spent most of the 2000s acquiring corporations with the help of cash flow-based loans, you’re going to have to do some serious contortions to convince your investor base, and the government, that this is a game you’re qualified to play. More to the point, you’ll need to hire the right team and explain how they’ll thrive as an add-on to the brilliant private equity franchise you’ve built (GPs at large private equity firms have historically been good at this, it must be said).

The terms of the government’s offer to private capital managers is generous enough to stimulate serious interest. Those who wish to buy pools of loans will be able to do so with as much as 6-to-1 government leverage and 50 percent matching equity from Uncle Sam. A fund manager could end up controlling an $84 million portfolio with just $6 million of its own equity.  
The five-or-so managers selected to snap up legacy securities will get up to $3 of government co-investment and debt for each $1 in equity they pony up.
The Obama administration and the Democratic Congress want to spend many more dollars to fix and transform the US economy, and the first details of PPIP should encourage private capital managers that, amid the Wall Street bonus outrage, their pursuit of profit will be considered an essential ingredient to the success of this and future stimulus plans.