Back in mid 2007, something unusual happened. That is, major private equity funds couldn't get funding for their deals. Yes, it was an ominous sign, which propelled the credit crunch and led to a grinding recession.
Now, the doom-and-gloom is fairly pervasive. In fact, there's talk that private equity is headed for a mega bust.
But, might this be an exaggeration? This is the sentiment of one of the legends in private equity, KKR's Henry Kravis.
After all, private equity has survived some tough times, such as the early 1980s (the prime rate reached 21%, after all). Oh, and there was the S&L implosion during early 1990s.
Let's face it, private equity operators will find ways to pounce on opportunities, especially since there are compelling valuations in the marketplace. True, it might be tougher to get traditional bank loans. But, why not find alternative sources, such as sovereign wealth funds?
Or, another idea is to create new debt structures, which allow institutional investors to invest directly. In a way, this would represent a disintermediation of the banks.
However, the fact remains that the current downturn is severe – and global. Besides, the private equity industry binged on low-cost debt from 2002 to 2007. Thus, there will be a big focus on existing deals, which could take away attention from new transactions.
Finally, it's a good bet there will be increased regulation on private equity funds, which will likely stall things even more.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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Reader Comments (Page 1 of 1)
2-02-2009 @ 4:58PM
BHarrison said...
The rationale of this article simply does NOT make sense. In the 1980s with interest rats at 21% (where investors were making darn good returns) has no relevance and/or comparison to the existing markets where interests rates (home mortages) are the lowest in our life time, and investors are barely receiving any RoI, certainly not commensurate with the risks involved with the investments and the markets. And back in the 1980s there WAS a lot of faith and confidence in the markets . . . which certainly do NOT exist at this time or in the future for the next cuple of years.
The comment about "creating new debt structures" smacks of some variation of the derivatioves; and that is not going to be successful. The FIs and the markets only salvation will be via INSTILLING INTEGRITY in the financial reports. Otherwise, the average investor simply does not have the faith and confidence in the FIs or the markets/funds. When fund managers are investing in "zero interest T-Bills" that certainly reflects a lack of faith and confidence in the market by even the professional "insiders". This article sounds like a lot of hype to just get some market activity . . . where is the RoI with potential returns commensurate with the risks? I simply do not see that in what this article is hyping.