Private Equity Comeback: Goodluck, and Godspeed

23 Mar

PE Hub just did an interview with GTCR principle Phil Canfield about all sorts of fun stuff, like this impending M&A Boom that’s coming this year.  Before I get into his remarks, let’s do a quick and dirty summary of our last PE/M&A boom (Forgive the gross over generalizations and run-on-sentence):

Lazy/unqualified investors (Pensions, endowments, CLO’s, etc) seeking yield, outsourced “diligence” to the NRSRO’s, themselves hopelessly conflicted with these same investors, enabled various corporate and sponsor M&A deals, often themselves enabled not by fundamentals (or even “fundamentals”) but by “innovative financing” the details of which were often too complex for these aforementioned investors and Ratings analysts.  As this snowballed, equity prices zoomed skyward as everyone adopted a “mee-too” mentality, further adding-to the mountains of M&A/LBO debt and associated derivatives until, *shocker* it all came crashing down.  The equity, the debt, and, oh yes, the derivatives.  Anyone remember Gordian Knot?  Perhaps the most aptly-named financing vehicle in history, but I digress (and realize that’s a much larger/slightly different issue, but couldn’t help myself, shh!)

The Reformed Broker mostly echoed my expectations a few days ago, although as you’ll see, mine are a bit more harsh, another *shocker* I know.

GTCR’s Canfield cites a few reasons why he and his cohort expect a new M&A boom (these are partial summaries and my reactions.  Read the PE Hub article for his full responses):

  • Rebound in valuations: Non one wanted to sell their company at 2008 levels even though everyone wanted to buy cheap, alas, no activity.  This year, while I disagree but am not surprised to hear, acquirers and targets see more eye-to-eye on valuation.  Let me remind you, while I have no doubt there’s exceptions and good values to be had, just taking a look at the retail index and the broader incicies, really?  Check it out, that’s the past 3 years, 3/07-3/2010.  Somehow (and again, this is very 30,000′ level), were it my money at stake, I’d be VERY careful buying any company at 2007 valuations, especially consumer discretionary.

  • Availability of financing and increased liquidity.  True, high-yield issuance has recovered substantially, but, and this is what I love (but not my area of expertise so  I’ll be brief), CLO markets.  Also, he mentions the increased cash on S&P 500 companies balance sheets…Does anyone see a similar pattern starting to emerge here?
  • Oh, and the best part, the true reason (at least for sponsor-backed deal-making): half a trillion dollars of committed but uncalled capital, capital that’s only locked-up for another 2 or 3 years.

So, lets make sure we all understand what’s going on here: If PE firms don’t spend this $500bn in the next 2 or 3 years they have to give it back to investors.  I think, well, hope, even the most novice observer should realize by now that little, if any of that money will go un-spent.

Instead, PE firms are on the clock searching for deals, AFTER valuations have largely jumped back to pre-crash levels, with the same/similar kind of financing arrangments/structures that caused (at least fueld) the bubble.

What’s the saying about myopia again? “Those who fail to learn from history are doomed to repeat it?”

Ya, this will end in tears.

LP’s: I wish you the best of luck with your PE portfolio’s over the next 5-10 years.


A sharp twitter follower points out (and I can’t believe I didn’t think of this myself, argh!), there is a solution for some LP’s: systems like GS TRuE.  I’m hardly an expert on unregistered securities trading, but seems like his suggestion could work…anyone care to comment?


10 Responses to “Private Equity Comeback: Goodluck, and Godspeed”

  1. Julian Castle March 25, 2010 at 5:45 pm #

    Can you do a piece on how Goldman and Greece used currency swaps to hide their deficit?

    -currency swap neophyte

  2. HeadlessHorseman March 28, 2010 at 3:00 am #

    I like this site! Well done.

  3. Jon Jacobs March 28, 2010 at 8:15 pm #

    It sounds like you’re talking about LPs exiting their PE commitments via secondary market sales through niche platforms. That could perhaps help some, but won’t eliminate the systemic overhang. After all, if someone’s selling, someone else has to be buying – and that’s someone who otherwise might have become a primary market buyer (i.e., new LP for a PE firm).

    By the way, at this point the dominant system for trading restricted stocks & other securities isn’t GS True but SecondMarket. They started in that niche (were called Restricted Stock Trading Partners until 2 years ago) and have since expanded into numerous other asset classes, mostly fixed-income. Now they’re set to expand into Asia after $15 million injection from Temasek & Li Ka-Shing:

    • Anal_yst March 28, 2010 at 8:45 pm #

      Interestingly enough I was joking (kind of) with someone that we should start a PE firm to buy-up LP interests. Agreed, though, there probably isn’t enough liquidity in the World to eliminate the larger issue, which means…LP lawsuits (most of which will likely be baseless, ass-coververing, etc), no?

      I didn’t realize SecondMarket had gotten so big/diversified, I think its a pretty sweet idea, wonder what the market share breakdown is between them, GSTrUE and/or others, do you know?

  4. Jon Jacobs March 28, 2010 at 9:17 pm #

    I should note that I don’t know if SecondMarket covers PE secondary market yet. I also haven’t seen anything about their market share in any asset class. But they have released plenty of data about number of investors who’ve signed up with them (qualified & enabled to do transactions on their platform) and volume of transactions handled. I think they claim to have processed $2 billion worth of transactions last year, but I don’t have a clear idea how big or small that is in context (especially since they’re involved with so many asset classes now). Those and other figures can be found on their Web site.

  5. Tyler Newton March 31, 2010 at 11:41 pm #

    I agree the money will be invested and that the returns will be poor.

    This is exactly what the VC guys went through last decade. They have to invest their money, or they will lose their management fees. I know guys that are still milking management fees off of funds that have been walking dead since 2002.

    I wrote about this on PE Hub last September:

  6. Ernestine Zimmerer April 9, 2010 at 10:53 am #

    Hi good post, im currently studying this at college. I like your blog there’s some real helpful stuff on here. Will check back soon to see if you have posted anymore pages, thanks

  7. Gregory Despain June 6, 2010 at 10:33 am #

    Interesting blog, thanks for posting this.


  1. Hot Links: Repo Men, Baby Talk & The Chinese Death Cross The Reformed Broker - March 23, 2010

    […] On the potential for an upcoming private equity boom.  (StoneStreetAdvisors) […]

  2. Tuesday links: inflection points Abnormal Returns - March 23, 2010

    […] “If PE firms don’t spend this $500bn in the next 2 or 3 years they have to give it back to investors.  I think, well, hope, even the most novice observer should realize by now that little, if any of that money will go un-spent.”  (Stone Street Advisors) […]

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