Buyouts and the Credit Crunch

Buyouts Under Pressure in Credit Crunch

As the economy falters, several major private equity-backed companies have filed for bankruptcy revealing a grim insight into the recession’s impact on private equity. A new article shows how private equity buyout firms are feeling the squeeze of the credit crunch.

While earlier this week a report showed that salaries and bonuses were staying strong for private equity firms despite the financial crisis, it appears that many companies acquired by private equity firms are now struggling under the amount of debt used for the buyouts. The New York Times has a critical article that points toward private equity as a contributor to the United States’ struggling economy:

Private equity firms embarked on one of the biggest spending sprees in corporate history for nearly three years, using borrowed money to gobble uphuge swaths of industries and some of the biggest names — Neiman Marcus, Metro-Goldwyn-Mayer and Toys “R” Us.

Linens ’n Things, a big retailer owned by the private equity firm Apollo Management, filed for bankruptcy protection this year.

The new owners then saddled the companies with the billions of dollars of debt used to buy them. But now many of the loans and bonds sold to finance the deals are about to come due at the worst possible time.

The piece presents a bleak outlook for those who are working for an acquired firm and those who invested in private equity too, as returns are expected to decrease in the near future:

People who work for companies owned by private equity firms could lose their jobs as firms cut costs to meet their debt obligations. And private equity firms like Apollo Management, which owns Harrah’s and Linens ’n Things, face deep markdowns on the value of their holdings.

Pension funds and college endowments that invested their money into in these funds in recent years hoping for big returns are likely to suffer as well, and many of those investors could face a cash squeeze, as they are forced to hold onto their investments for years until the economy recovers.

To read the full article click here.

Tags: Private Equity Buyouts, Buyout firms, LBO, leveraged buyouts, credit crunch, private equity and the credit crunch, private equity, Buyouts, buyout firms, private equity firms

Private Equity in the Financial Crisis

Starting a Private Equity Fund in the Financial Crisis

While the current financial crisis has in some ways limited private equity, primarily by reducing a private equity firm’s ability to leverage a buyout, the crisis could also yield huge returns to private equity firms that start funds for buying up profitable assets. Dwight Bush hopes that his new private equity fund will thrive by identifying and purchasing profitable assets at low prices from the government and other funds.

Making the Best of a Bad Situation
The financial crisis could be very profitable for private equity funds. At least this is the bet that some investors are making, hoping to capitalize on the weak assets available by fixing them up and selling them for a profit. One such optimist is Dwight Bush, an experienced corporate banker who is setting up a private equity fund, he is also the subject of a recent Washington Post article. One might wonder why he chose this bad economic period to start a private equity fund, or how he plans to raise capital from “cash-strapped” investors and more importantly how he hopes to give his Limited Partners more money than initial investment? Here are his basic answers to these questions:

Why choose a financial crisis to start a private equity fund?

Bush: “What we know is that the last time we had a mortgage meltdown, there were great fortunes made,” Bush said. “In this type of fragmented environment, those people who can identify good assets that are undervalued . . . people like Joe Robert . . . and that can work with those assets over time to help realize their true value” will make lots of money.”

What is his strategy for his private equity fund?

Bush: He said the private-equity fund plans to do two things: manage assets that the federal government buys from banks and buy assets that the “Paulson Plan” auctions, then fix them up and sell them — hopefully at a profit.

Additionally, he hopes to make money of hedge funds dishing out assets at fire-sale prices. Some $43 billion came out of the hedge fund market in September because investors are demanding their money. Bush said hedge funds are selling off quality assets, from manufacturing companies to farmland to commodities, at low prices so they can give cash to their impatient investors.

Okay, sound strategy, but where will the private equity fund get money to buy the assets?

Bush: “Remember one thing,” he said. “Every month, pension funds take in money and pension funds have an obligation to pay their retirees over time. So new capital is available in the market every month and the money has to be put to work.”

What about the private equity buyout model based on leverage in light of the current credit crunch?

“In the short term, private-equity firms will tend to work more with strategic partners, and the assets acquired will be less leveraged,” he said. “Over the long term, you’ve got to remember that banks have to lend to make money and that this too shall pass. My view is that the current situation should reach bottom some time in early to mid-2009, and by 2010 we should have a more robust economy again.”

Dwight Bush presents a strong argument for why private equity can endure the financial crisis with what he sees as eternal investment capital (pension funds) and long-term lending from banks that necessarily lend in order to make money.

Tags: Private Equity, Private Equity Fund, Financial Crisis, Private Equity Funds, Private Equity Fund manager, Dwight Bush, Private Equity and the Credit Crunch, Private Equity Fund Management, Private Capital