The VC Roadmap for Buyouts
In a recent DealBook column by Andrew Ross Sorkin, Guy Hands of buyout firm Terra Firma provides an unvarnished appraisal of the buyout industry’s bubble-era mistakes and its post-bubble outlook. It will surprise no one if the large majority of buyout deals completed during the credit bubble of 2006 to 2008 turn out to be bad deals. If that was the only issue facing buyout funds, everyone could just take their lumps and move on in a couple of years. The core problem is much more fundamental. The buyout industry has sized itself based on management fees drawn not only on the record amount of capital invested during the bubble years, but also on the record amount of committed capital for investments yet to be made. The pressure to maintain high management fees and the large amount of undrawn capital commitments conspire to create an environment in which even the deals that get completed after the credit bubble (i.e. from 2009 to 2012) are also likely to produce poor returns in the aggregate. Unless the industry reforms itself, the net returns for vintage year 2006 to 2010 buyout funds are likely to be worse than even Mr. Hands predicts.
