Private Equity in a Tsunami
Bill Warner Monday, December 08, 2008
To use an analogy, we have a fault line in the earth’s surface in the credit markets. The pressure became so great between the tectonic plates of home mortgages and bank solvency that the fault line shifted causing a massive earth quake that was felt around the world. The resulting tsunami devastated the shores of the public markets which in turn decreased the value of private institutions and foundations. The tsunami is still reverberating around the world and has now reached private equity firms and individual investors.
Look to Your Government for the Cause of the Pressure
All of this is a result of congress and the administration applying the pressure on banks to make bad mortgage loans to people who couldn’t afford them. Add to that the incentives given to banks to protect them from these bad loans through Fanny Mae and Freddie Mac. This pressure had been applied for over 30 years, since the Carter administration, until finally the fault line gave way causing a massive economic disaster. The shame of it all is that they knew it was coming and did nothing about it; thanks especially to Barney Frank and Chris Dodd. Now our government, who has mismanaged Social Security and Medicare, is going to help to manage financial institutions that they drove to insolvency and potentially the auto industry which they have regulated and maneuvered into uncompetitive and bloated monoliths. God help us. We really need more pressure across more fault lines in our economy.
Private Equity Feels the Pain of the Tsunami
The most recent news in the New York Times is a case in point. Leon Black of Apollo Group says that “Traditional private equity is dead and has been for a year, and it will probably remain so for a couple of years.” Private equity has enjoyed several very good years as markets expanded. Now with markets declining, many of them are in dire trouble, especially if they have high debt. Some private equity firms are aggressively renegotiating their debt agreements, begging for more time to turn themselves around. The institutions that they rely upon for capital were crushed in the tsunami and are pulling capital out of the private equity markets. This is bad news for companies looking for venture capital financing, because the source of their funds is drying up. Apollo is not alone. Other major players are scrambling including Blackstone Group, Kohlberg Kravis Roberts, and the Carlyle Group.
Private Equity Firms May Rebuild as Something Else
Mr. Black remains optimistic and says he is poised for the further turbulence from the tsunami. He has recently gotten additional funds which he will use to buy cheap debt. He says that the big money over the next few years will be made in vast restructurings; the financial, operational and structural changes that companies will need to make if they hope to survive the economic malaise. He will probably have to start with some of his own companies.
This case in point is simply evidence that private equity firms are not going to stand still and allow themselves to fail. They will move to where the money and opportunity is. Cleaning up after the tsunami might be a very good place to start and hopefully the government will stay out of the way this time.
Filed Under: Angel Investment, Financing a Company
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
