To paraphrase author Cullen Hightower, humans only seldom experience moments when they are absolutely free from worry. These brief respites are called panic.
Panic tends to be identifiable only in retrospect, because if the event in question was truly as horrible as originally feared, all that screaming wouldn't be panic, but a rational reaction. But if the event in question turns out to be not so bad, the people who stampeded for the doors tend to wish they hadn't.
It's too soon to judge whether the credit market shutdown of the past summer inspired panic or something more rational. But as is often the case when the cops break up a wild party, there will be people who say and do things that in hindsight appear imprudent. And in the case of private equity mega-market participants, there will be people who, given a second chance, would have attempted to address short-term problems in a manner more befitting the maintenance of long-term relationships.
Take, for example, the many financial sponsor investment bankers who, often at the behest of their superiors, were given the unenviable task of telling buyout GPs that contracted financial terms for certain deals were going to have to be renegotiated. Depending on the bank and the individual banker, these unpleasant conversations ranged from a tough, “here are the new terms” approach, to a more wistful “we're committed to the financing, but just so you know, this will cost us a lot of money” tack.
Considering the amount of money that private equity firms have paid in fees to Wall Street in recent years, the response among GPs to these conversations has not uniformly been one of cheerful acquiescence. “Things really got ugly with some of the bigger firms,” says a top investment banker with major private equity clients.
General partners will be even more chagrined at the behaviour of some of their investment bankers if the market dislocation gets relocated faster than originally expected. Early indications are that this may be the case. Of the “hung bridge” deals that actually get completed, much of the debt will end up getting sold at 96 to 97 cents on the dollar, as opposed to 90 cents, according to the investment banking source. Debt buyers expecting a fire sale are going to be disappointed, he says. Prices may firm up even further if a planned $80 billion fund backed by banks starts gobbling up loans.
To be sure, it will take a while for the market to work through the vast amount of LBO debt that needs to be sold, but it is already apparent that an appetite for bite-sized pieces has grown into a hunger for even bigger bites. According to a source familiar with the transaction, bankers were able to sell more than $9 billion in term loans for the $30 billion First Data buyout after initially going to market with loans worth half that amount. The difference between these loans and the ones that were originally agreed to was one covenant, according to the source.
The major private equity firms have not always had smooth relations with the investment banks to whom they pay so many fees. Two investment banks – Credit Suisse and JPMorgan – banished their in-house private equity firms after being excoriated by big private equity clients, who claimed that the in-house teams were competing with them on deals.
Today, the IPO filings of Kohlberg Kravis Roberts reveal that the buyout firm is planning to create a sort of in-house investment bank to syndicate debt and otherwise avoid paying certain investment banker fees. Being told by their investment bankers that committed financing wasn't set in stone after all must have further inflamed the desire among Kravis and company to launch a rival platform.
No matter how angered GPs were at the summertime solicitudes of some of their investment bankers, it is unlikely that any permanent client-agent disruptions will occur. GPs need these services, and they want them at the best prices. A traveler might have a terrible experience with an airline – turbulence, rude service, bad food, delays – and fly with the very same company the next month because the price and times are just right.