Lately, there's been lots of dire talk about the private equity world. Returns are likely to be much lower and perhaps there will be many firms that shut down.Indeed, such things may turn out to be true.
However, whenever there is extreme turbulence and a pervasive credit crunch, there are also big opportunities to make money. Just look at Apollo Management and Cerberus Capital. Both firms made a killing during the rough early 1990s.
Fast forward to today, and we may be seeing something similar with one of the top beneficiaries possibly being Lone Star Funds. Yes, this week the fund purchased a collateralized debt portfolio from Merrill Lynch & Co. (NYSE: MER) at 22 cents on the dollar [subscription required]. The face value on it? About $30.6 billion.
This is not a one-off deal as it looks like Lone Star is hungry for high-risk debt. For example, the firm recently purchased the mortgage division of CIT Group Inc. (NYSE: CIT) and acquired Bear Stearn's mortgage segment. There was also the purchase of Accredited Home Lenders Holding Co. for $295 million.
All in all, this is risky stuff, but the chief of Lone Star, John Grayken, has lots of experience with structuring complex deals for distressed financial institutions. During the early 1990s, he worked for Robert Bass -- a Forth Worth billionaire -- and made a variety of deals for ailing S&Ls.
Then, in 1995, he started Lone Star, where he focused on troubled financial institutions in Japan and South Korea.
Lone Star's recent dealmaking does not necessarily mean that the credit crunch is thawing and the housing/mortgage markets are coming back. After all, private equity firms can hold investments for several years.
Then again, such investments are a good sign since they show that the smart money does see value in the marketplace.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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