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Slump in Private Equity Deals

Stock-Markets / Credit Crisis 2008 Aug 14, 2008 - 05:43 AM GMT

By: Mike_Shedlock

Stock-Markets Best Financial Markets Analysis ArticleBloomberg 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.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

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