It's official. Private equity is back, or so said The Economist in its recent article “The Comeback of Private Equity” (http://tiny.cc/wkQUu).
The UK magazine, a champion of free-market economics, gave a mixed report to the private equity firms that are stepping in to offer a remedy for the credit crunch.
Two transactions in particular caught the author's eye. TPG Capital, the US buyout group, led a $7 billion (€4.4 billion) injection of capital into Washington Mutual (WaMu), a US savings and loan bank that is the country's sixth-biggest bank and mired in subprime mortgages. TPG is also one of three firms alongside Apollo Management and The Blackstone Group that are reportedly negotiating with Citi to snap up $12 billion-worth (€7.5 billion) of leveraged loans that have been stuck on the bank's balance sheet since the credit markets froze.
However, The Economist said of the Citi deal: “It may suit private equity firms to buy the debt of companies that then default, in order to gain control of them cheaply. But picking the bottom of falling markets is something that investors can do for themselves without paying hefty fees.”
Of WaMu's rescue, it thought TPG was underplaying its hand. “Regulators are jumpy about who runs banks: TPG has reportedly promised WaMu's supervisor that it will not use its holding to exercise control. That rather defeats the point.”
Goldman Sachs, which advised on the WaMu recapitalisation and counts the bank as a client, was confident the stock had further to fall. Roddy Boyd noted over at Fortune: “Goldman Sachs recently provided a glimpse of one of the rarest occurrences on Wall Street: an analyst recommended that clients bet against a company by selling its shares short. In this case, the company was struggling Seattle thrift Washington Mutual, which happens to be a Goldman banking client.” We will never know what Goldman's proprietary position was.
Bloggingbuyouts.com (http://tiny.cc/gsMto) was more generous on the buyout firms' interventions. “While I agree on the verdict still being out, this is actually a relief to see. Frankly, the cash has to be put somewhere and the good news is the debt markets have thrown out the baby with the bathwater. There will be real winners and real losers in this. There always are. But this will kick back a steady flow of funds or will at some point, and those funds will either be paid to partner/client groups or will be used to fund investments when a better climate is present.
“Someone has to act as a vulture. The issue always boils down to “at what price is this worth the risk?”
Of course to the opponents of private equity, these deals are a gift. The IUF, an international union association and staunch critic of buyouts, noted (http://tiny.cc/€0aau): “Picking up heavily discounted buyout debt could bring massive rewards to funds who lost out in bidding wars which drove purchase prices to ludicrous earnings multiples – and leave them in possession of the company in the event of a default. All the classic conflict of interest issues raised by the buyout process are magnified and intensified here.”
But perhaps the last word, for now at any rate, has to go to Melonie, a moderator on a niche online forum for exotic dancers (http://tiny.cc/4y8TC). Commenting on The Economist's article she displays a somewhat jaundiced view of the industry: “The way it makes any ‘profit’ is via the very cruel method of destroying the income of the workers in these organisations. All these takeovers feature not hirings but LAY OFFS. And if this happens more and more, the world economy falls apart.” When strippers are warning of the dangers of asset-stripping, then the industry clearly has its work cut out positioning itself as the saviour of the financial system.
On that, Melonie and The Economist can agree.