Private Equity Deals Wane

Bloomberg is reporting KKR, Apollo Seek Debt Investments as Private-Equity Deals Wane:

Aug. 14 (Bloomberg) -- KKR & Co. and Apollo Global Management LLC, two private-equity firms planning to go public later this year, are turning to debt and distressed-asset investments as financing for leveraged buyouts remains scarce.

KKR, run by Henry Kravis and George Roberts, and Leon Black's Apollo plan to invest more in debt instruments, including mezzanine debt, subordinated debt and leveraged loans, the two New York-based firms said in separate filings this week with the U.S. Securities and Exchange Commission. The move may help offset net losses they recorded during the first quarter of 2008.

Wall Street investment banks have cut back on lending as turmoil in the credit markets forced them to take more than $500 billion in writedowns, losses and credit provisions since the beginning of last year. Announced private-equity deals worldwide so far this year have fallen 71 percent from the same period last year to $179.4 billion, according to data compiled by Bloomberg.

As the private-equity firms diversify beyond LBOs, they may collide with investment banks facing a similar identity crisis amid a dearth of IPOs and declining fees from investment banking.

"The real question is what business is everyone going to be in," said Linda Gridley, founder of Gridley & Co., a merger and acquisitions advisory firm based in New York. "The business models for the large Wall Street firms and the private-equity firms have to transform."

No Surprises Here

I am certainly not surprised by this report, given that just yesterday in Uno Pizza Chain Misses Bond Payment I stated:

"The private equity model of stripping assets is finally on the deathbed. There is not going to be easy money for pirates to borrow to continue to loot companies, soak them [with] debt, pay themselves handsomely, only to let the companies they buy rot in a death sentence.

The moral standards of those who have been engaged in such activities is totally disgusting. What will put a halt to equity stripping is the collapse of the credit markets. Ability of private equity to raise capital at cheap rates has vanished. This is a good thing."

Business Model Will Have To Change

The easy money looting corporations has been made. And now Private equity is looking to invest that loot in mezzanine debt, subordinated debt, and leveraged loans. Bernanke has other ideas.

Bernanke's Plan To Sink Private Equity

Bloomberg highlighted Bernanke's Private Equity Plan in Bernanke Urges Consolidated Investment Bank Oversight:

Bernanke also said the Fed is looking at ways to make it easier for private equity companies to invest in banks, as lenders seek to raise capital to repair their balance sheets. Private pools of capital are limited in how much of a bank's shares they can buy, and how they can structure their investments, under bank regulatory rules.

"Private equities are a very good source of capital," Bernanke said in answering questions at the hearing. "We are currently looking" at rules governing investments in banks "in the hope that we will make a clear statement about when private equity can come in and add capital.

Frightening Thoughts

Inquiring minds may wish to read the rest of the article paying particular attention to frightening statements from Congressman Barney Frank and Fed Chairman Ben Bernanke. Here are two prime examples.

Barney Frank: "The Federal Reserve needs more power".

Ben Bernanke: Congress should consider rules and mechanisms for liquidating "a systematically important securities firm that is on the verge of bankruptcy".

The Practical Side Of Affairs

Assuming Bernanke gets his wish and private equity firms invests in banks, will this heal the system? If so, in what timeframe? For whose benefit? I posted the answers to those questions in Not Practical To Tell The Truth.

The answers come from Minyanville's Mr. Practical and they are well worth repeating. Please consider The Bigger Picture:

 

We hear from apologists that banks selling stock will "heal" the system. But again that's not how it works. It only transfers wealth from one part of the system to another because wealth is not being created. There's no production, only transfer. It's a hallmark of deflation that companies sell stock. That is deflationary. People have to use cash to buy stock. So cash goes from investors who have less cash to buy things with, to banks who use it to write down debt. But the point is banks selling stocks to investors reduces liquidity, it does not increase it.

The government’s strategy is to buy time. It always is. Time allows it to slowly drain wealth from the poor/middle class and re-distribute it to the rich who own the financial system.

Private equity and the Fed have the same goal: To drain wealth from the poor/middle class and re-distribute it to the rich. It's a match seemingly made in heaven. However, if private equity starts executing Bernanke's plan to invest in banks, the odds are it will zombify both private equity and the banks.

Comments

[neeb??:]

And that just about does it for the entire system. No one but the rich will have money and the poor/middle class who seem to have been conditioned by the 'ruling' classes will be fighting it out with each other that they will now discover that they are now serfs of the new feudal era.

2008 Aug 14 08:53 AM

[EE:]

Transfer most cash out of USD into silver & gold bullion with more $ in silver. Read Jason Hommel, Ted Butler and Peter Schiff unless you want to be a serf. August has again put the metals and junior mining stocks on sale!

2008 Aug 14 09:16 AM

[dtblount:]

"Private equity and the Fed have the same goal: To drain wealth from the poor/middle class and re-distribute it to the rich."

That really might be the most ridiculous thing I have read in quite some time. I'm not sure which specific Marxist philosophy you follow, but the Fed certainly wasn't established to transfer wealth away from the middle class.

Section 2a of the Federal Reserve Act says..."The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

Those goals certainly seem like they would benefit all of society to me.

As for your attack on Private Equity firms, it is advantageous for banks to raise capital from PE firms simply because many of them are flush with cash and have orchestrated turnarounds before.

Yes, some PE deals have seen a level of corporate plundering, but nothing is pure. The vast majority of PE deals make money and work because the new management runs the company by the numbers and they manage risk better than the previous operators...which is something that always works and will always make money...

Please, spend your time learning basic economic and financial principles rather than reading and commenting on populist conspiracy theories.


Cheers

2008 Aug 14 02:48 PM

[neeb??:]

The actual scenario pointed at is what happens. Your " Fed" is supported by tax dollars as well as private equity. Who do you think pays the fed?
There is more to the story than what appears to be just some magic "market force" that were generated by Human actions. These market forces did not fall from the sky and they were generated for some kind of effect.
Having said this I would like to ask some questions.
How does a person go about explaining things without necessarily falling into some abstracted narrative or some illuminati conspiracy theory?
If certain 'policies' are followed and certain effects 'acheived' then how does one approach these statements? Especially when assumptions have to be made to 'acheive any kind of 'effect'?
I really can go on with these plocks of mine so I will get off my cylinder at this time....

2008 Aug 14 03:03 PM

[dtblount:]

Money has, does, and will always run the world. It's a simple fact of life.

As long as "things" can be owned, those with more "things" will wield more power. Denying this - or arguing against property ownership - is inherently flawed because not all people are equal. Some have more skills in certain areas more valuable than others...some wish to work harder... The people with the most valuable skills, willing to work the hardest should be justly rewarded. Capitalism does this. It is by no means a perfect system, but it is the best we have right now.

At the same time, power and wealth need checks and balances - as well as "safety nets" in place for those deficient in certain skills or work ethic...and, YES, I am advocating a certain level of social programs and entitlement provisions, but it must be a careful balance as to not end up "subsidizing laziness."

Just as that extreme should be monitored and avoided, as should the other - obscene wealth. I am talking about money that sits and does nothing...not money that builds companies and infrastructure, creating a better world and better lives for those in it.

All that in consideration...and apologies for rambling a bit...why would anyone be surprised for the financial system and regulations to favor the wealthy?!?! The wealthy are, after all, those who create wealth. However, it was - and still is - completely absurd to make claims that Bernanke and the Fed have the goal of draining wealth from the poor and middle class to the wealthy, as the author purported.

Questioning legislation, political/social structures, etc is healthy and much-needed in any society, so I'm not criticizing that whatsoever. I am, however, ridiculing certain comments that are uneducated and flat-out irresponsible.


Cheers

2008 Aug 14 04:26 PM

[EE:]

The Fed, thus our system, is set up on 2% inflation as a goal. Deflation or stronger money is a bad word. Thus the Fed's plan from the start is to erode assets and buying power by about 2% annually from the un-rich and transfer it to those that control who keeps wealth for the in crowd. Then in self created emergencies double digit inflation is allowed for a while so everyone can cheer the return to 2% and be greatfull. A game of bowling used to cost 35 cents, bread 25 cents, a new car $ 3500. I wish deflation would allow my dollars that buying power today.

2008 Aug 14 04:42 PM

[neeb??:]

Dialogs are such great things are they not? It wasn't too long ago that there was a lot of screaming about back to the land and such but hey, excuse the drama narratives. some of us are not as adept at neccessarily understanding all of this. That said here is an interesting question that was thrown at me by someone I know who was 'told' they had a 'grade 2 equivalency in math' --- How many people do any of you know actually keep grocery receipts or even watch how much they spend on their grocery bills?
Have a good time with this question...
And cheers to you,El CidCampeador

2008 Aug 14 08:50 PM

[dtblount:]

EE, you need to sharpen up your basic economic knowledge. A stable monetary policy is good for the US in the sense that we do not produce every single thing we need domestically. If the dollar were to appreciate sharply for an extended period of time, it would hurt the US economy because exports would fall dramatically. Deflation also destroys the value of fixed assets, such as real estate...as well as valuations in the equity markets. The end result of deflation is simple - economic depression.

As for inflation, it is necessary. Low and controlled inflation is a byproduct of a healthy economy. It allows for a "cushion" for wages to be cut instead of jobs eliminated altogether. One of the basic principles of the Phillips Curve is that the higher unemployment is a result of extremely low inflation.

Essentially, your comments show your lack of knowledge on economic policy, so there really isn't much sense in attempting rebuttals...

neeb??, dialogues are indeed great. You pose an interesting question...which holds a great deal of truth. However, when the economy tightens up, people begin complaining about grocery bills and stop shopping at Whole Foods/Fresh Market in lieu of Costco/Walmart. In that sense, costs are controlled before expenditures are even made...


Cheers

2008 Aug 15 01:20 PM