One of the pleasures of covering an asset class in depth comes from watching it evolve over time. Mostly this is an incremental process of small changes in the industry's DNA to aid its survival. Typically these shifts are in isolation barely perceptible. But every now and again, they come in a flurry – usually in response to wholesale changes in the economy.
This is one of those moments. And observers of the private equity phenomenon are witnessing the moment when the industry pulls up its knuckles from the floor and private equity's homo habilis becomes homo erectus.
Two exogenous shocks to the system, the global debt drought and ramped-up public scrutiny, have changed the private equity landscape fundamentally. And this month commentators are telling the industry it's time to adapt or die.
The Wall Street Journal (http://tinyurl.com/33xex7) this month highlighted one of the successful mutations in a world of uncertain credit. The highest offer is not always the winning offer: instead, fortune is now favouring those who can get the deal to the finish line.
Often that means buyers who bring their own debt to the negotiating table, instead of turning to outside lenders.
The Journal said executives at firms such as Carlyle Group, TPG Capital and Silver Lake Partners all say they have had to spend extra time recently lining up debt before heading to the bargaining table. That means “five to six extra calls” to the firm's limited partners to persuade them to contribute some debt to a deal, TPG partner Michael MacDougall told a recent conference in New York.
Such a tactic helps buyers lock in financing terms that are more certain than if they were to go to banks, says Glenn Youngkin, a Carlyle managing director. Banks that agree to help finance a deal but that haven't already sold the debt can only offer a range of rates for a deal. They can't be sure what the final terms will be until the debt is actually syndicated to investors.
Kohlberg Kravis Roberts presumably saw this trend coming when it set up its equity underwriting unit last year. Increased public and regulatory scrutiny is also prompting a number of interesting mutations in the buyout gene pool. The anti-private equity argument is undiminished by the collapse in mega-buyouts. The headlines may have subsided but as Europe's World, a European policy journal, highlighted, the debate is still fierce (http://tinyurl.com/3xhqve). The pensions, savings and jobs of ordinary people are being threatened by hedge and private equity funds, warns Poul Nyrup Rasmussen, president of the Party of European Socialists and former Danish prime minister.
“The full repercussions of the financial crisis triggered by bad mortgage debts in the United States are still unclear, but what we do know is that its unforeseen effects already include an unstoppable demand for greater transparency in our financial markets, and better regulation,” he writes. Private equity is the bogey man and Rasmussen is not pulling his punches. “Private equity funds are a menace to healthy companies, to workers' rights and to the European Union's Lisbon Agenda, aimed at making Europe the world's most competitive economy.”
Over at blog Influence, which covers the business of lobbying (http://tinyurl.com/yrk9mc), its breakdown of the spend on lobby firms by the Private Equity Council shows the industry is taking its reputation very seriously indeed. The fledgling trade organisation spent $780,000 on lobbying fees during the second half of the year as the group fought against an effort to up taxes on record private equity profits, Influence reports.
Meanwhile in the UK, trade association the BVCA has gone on what The Independent newspaper called a “£140 billion charm offensive” (http://tinyurl.com/34osma). Private equity-backed companies have contributed £140 billion in tax to the UK economy over the past five years, according to a new study commissioned by the industry trade body.
The report showed that tax contributions totalled £35 billion last year. The trade body said: “That's enough to pay for every nurse and police officer in the country.”
In evolutionary terms, this is the equivalent of standing tall, confident and proud.