Government's claws waiting for private equity?

Posted Jan 30th 2009 1:10PM by Tom Taulli
Filed under: Private Equity, Blackstone Group L.P (BX)

The buyout binge – which lasted until mid 2007 – got its fuel from major banks. Of course, with the credit crunch, the spigot has closed shut, putting the ice on dealmaking.

But once the banking system comes back, will we also see a big comeback in private equity?

Actually, this may not be the case. President Barack Obama has wasted little time in taking the offensive against Wall Street fat cats. Of course, he put the kibosh on Citigroup's (NYSE: C) attempt to procure a $50 million plane. Obama also said it was "shameful" for Wall Street to dole out $18.4 billion in bonuses last year.

And, the fact remains that the federal government has massive equity stakes in the top banks in the U.S. In other words, it's a good bet that Obama's economic team will be fairly intrusive – and this could mean focusing on bread-and-butter business and consumer loans, not buyout deals.

Thus, expect a heap of new regulations, which will likely make it more difficult to extend risky loans. In fact, this will be the case in other countries, such as the UK (where there has been a massive government bailout of the financial services industry).

Consequently, it seems inevitable that there will be consolidation in the private equity space, through mergers and liquidations. At the same time, expect these firms to change their approaches. As seen with Blackstone (NYSE: BX), Carlyle and Apollo, private equity will probably move away from buyouts to investments in distressed debt, realizing that it will take a long time for dealmaking to make a comeback.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a free online business valuation tool for small businesses.

Tags: Government regulation, GovernmentRegulation