As the Economy Suffers, Private Equity Steps Up

As a follow up to my post on "Blackstone Group: A High Beta Play on Recovery", news came out that Kodak (EK) is going to raise $700 Mil through a series of transactions, including $400 Mil from secured debt issued to private equity firm Kohlberg Kravis Roberts & Co. (KKR) (KFN). In exchange for funding, KKR gets two seats on EK's board.

In my previous post I talked about how private equity fills a big need during hard times like the current recession (is it still?), and these firms are gonna make tons of money out of it. The EK capital raising is just one of many deals to come. Banks are reluctant to lend, the government is head over heels in deficit so companies which need funds to reorganize and shore up balance sheets turn to private equity. Many private equity firms are liquid enough to be sources of credit at this stage, and since most of these are in the form of convertible debt or some form of warrants, they are going to rake it in once the economic machines start churning again and asset prices start rising from a very small base.

When equity markets recover and IPOs become a regularity again, these private equity firms will get their lucrative exits

Also take note that KKR is planning to list in October in Amsterdam, and are in a hurry to get it done. They plan to use this as a stepping stone to eventually (about a year later) list in the NYSE, which has higher corporate governance standards. Why are they in such a rush to settle on listing in Amsterdam first? Some speculate they need the listing to attain currency for attracting and retaining talent and for more acquisitions.

All in all, I think private equity firms, whether it be BX or KKR are worth watching as future competitors to the likes of Goldman. Competitors like weakened investment banks and more tightly regulated hedge funds will be late to the game.