I’ve been writing for some time now about private equity firms, their questionable acquisitions, their untenable leverage positions, and the likely outcome for them, and their portfolio firms, as a result of the credit crisis (for background see Stupid Money Chasing Stupid Deals…). I was not surprised therefore to come across a recent New York Times article detailing their recent fate (see Buyout Industry Staggers Under Weight of Debt). Michael de la Merced writes:

With their big paydays and bigger egos, private equity moguls came to symbolize an era of hyper-wealth on Wall Street. Now their fortunes are plummeting. Celebrated buyout firms…are seeing their profits collapse as the credit crisis spreads through the financial markets.

If anyone thought that private equity acquisitions were driven purely by skillful strategists and financiers (alpha in their parlance), here’s your evidence to the contrary. Many such deals were a simple product of the times (fueled by the availability of cheap money and credit). This is not to say that some private equity players are not skilled, just that there are likely much much fewer of the skilled type than many of us had thought just as little as one year ago.

Frankly, I have expected this endgame for quite awhile now – one in which many of the private equity portfolio companies would go bankrupt, and potentially take a few of their parents with them (see Corporate Defaults and Bankruptcies).

But more than that, for me, these events officially mark the end of an era. We will likely look back at this period and eventually refer to it as the second LBO wave. In my opinion, there are now two identifiable, and distinct, LBO waves:

1. The 1980’s – the wave that most of us associate with the LBO heyday; driven by the break-up of conglomerates, culminating with the RJR Nabisco deal, and etched in our memories by the movie “Wall Street”
2. The 2000’s – the cheap money wave; fueled by excess leverage, cov-lite deals, financial engineering, and a dose of Sarbanes-Oxley compliance avoidance

This is not to say that I believe that private equity firms do not play a vital role in our economy. It’s quite the opposite. I firmly believe that they are an important part of a well-functioning capital market (see The Role of Private Equity…). It’s just that the latest private equity craze is now officially over.

We can now get back to our regularly scheduled programming – watching their enablers (the I-Banks like Bear Stearns) implode under the weight of their own bad debt.

This entry was posted on Friday, March 14th, 2008 at 10:22 am and is filed under Corporate Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.