The credit crunch has pretty much brought the private equity industry to a halt: Without access to cheap, readily available, debt with liberal terms, the leveraged buyout shops lack the paper they need to get the deals done.But the Wall Street Journal reports (subscription required) that some firms are now trying "equity buyouts" or EBOs -- deals that involve taking companies private without the use of debt. With companies available as cheap as they are now, some titans are betting that they can earn excellent returns without the leverage the has historically led to outsized profits.
Of course these deals are not without their drawbacks. According to the Journal, ". . . all-equity deals carry greater risk because firms are typically writing far larger checks than in a leveraged buyout. Companies also lose the tax-shelter benefits of interest payments on the debt, further increasing the overall cost of capital. Those factors can be controlled by paying a lower purchase price for the asset."
Let me make a prediction: When we start seeing major private equity firms like KKR, Bain and Apollo pouring money into companies in all-cash deals, that will be a sign of something like a market bottom. It will mean that the market is so cheap that very smart people are realizing that they can make a lot of money without the benefit of leverage -- and are willing to invest a huge chunk of their own money in the deal, instead of putting in a sliver of equity and profiting from management fees while selling junk bonds to pension funds.
The EBO is one trend worth keeping an eye on.
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Reader Comments (Page 1 of 1)
3-12-2009 @ 3:18PM
BHarrison said...
I would have to concur that the EBOs would certainly be a sign of a "bottom".
The leveraged deals allow the corporate raiders to maximize the use of their capital, and their investments. EBOs require too much capital, realtively speaking, so if EBOs become common, then things will have become extremely cheap . . . and the USA will be in one hell of a bad shape.