This week, some of the top veterans in private equity -- TPG's David Bonderman, Carlyle's David Rubenstein, and KKR's George Roberts -- got together at a conference in Hong Kong. And, all in all, it was fairly depressing (hey, I guess that's what happens when you lose billions and billions of dollars).
Take Bonderman. He thinks the downturn will be protracted, calling it an L-shaped recession (the more common description is a V-shaped recession, which means there is a strong snapback). In fact, he thinks U.S. unemployment will hit 10% or so.
Then again, keep in mind that Bonderman lost about $1.3 billion on his six month investment in Washington Mutual.
Despite all this, Bonderman still has an appetite for investments. For example, he's focusing on the debt securities from hedge funds. Because of massive redemptions, the prices are at distressed levels.
Rubenstein also gave a grim presentation (he thinks the downturn can last several years). But, he is still bullish on some opportunities, especially in Asia. For example, he thinks China offers some compelling valuations and that the country may become more open to outside investments.
In short order, the shareholders of Washington Mutual (NYSE: WM) have lost billions. A tier-1 private equity investor, TPG, has lost $1.3 billion on the company. And, unfortunately, thousands of WaMu employees have lost their jobs.
However, there are some winners. For example, there are the short sellers. JP Morgan (NYSE: JPM) is also likely to do well since the firm bought WaMu's assets for a mere $1.9 billion.
But there appears to be yet another interesting beneficiary: Alan Fishman. He is WaMu's CEO, who took the top job 18 days ago.
As should be no surprise, he signed a juicy contract: a $7.5 million signing bonus and a lump-sum payment for severance that comes to $6.15 million. In other words, if he leaves the company, he'll walk away with $13.65 million.
That's a pretty good deal in light of the fact that WaMu is the biggest bank collapse ever.
Moreover, I suppose it is yet further evidence of why Americans have low regard for the financial system. And despite huge bailouts, it's probably a good bet that little will change.
Even for the tier-1 private equity operators, a $1.3 billion loss is a big deal – especially when in comes in about five months. This is what happened today with TPG, which was a major investor in Washington Mutual (NYSE: WM). Of course, the bank's shares were virtually wiped out today because of a federal intervention that resulted in JP Morgan Chase & Co. (NYSE: JPM) owning the assets.
Interestingly enough, TPG has a long history with distressed investing. In fact, the company's founder, David Bonderman, made a fortune from the S&L crisis during the early 1990s.
But no doubt, today's environment is without any precedent. No one seems to have any clue about what's happening – which can make investing a dicey game.
True, distressed investing can result in hefty returns. It's important to keep in mind that the risks are substantial. Although, it sill looks like a variety of private equity firms still have an appetite for these plays, such as Fortress Investment Group LLC (NYSE: FIG).
However, the big beneficiaries may not necessarily be private equity firms. Even the recent loosening of regulations, private equity firms are likely only to make minority investments in banks.
Instead, it may be the major banks – such as JP Morgan – that will clean-up on the mess on Wall Street. They have strong balance sheets and tremendous asset bases to make such deals payoff.
Back in the 1990s, Washington Mutual, Inc. (NYSE: WM) was a big home run for the founder of TPG, David Bonderman. So, when he structured a $7 billion capital raise for the company in April, it seemed like a sign that the smart money had some keen insight, right?
However, in today's wacky market, nothing seems to work out. For example, TPG's investment price was $8.75 per share. Keep in mind that this was a 33% discount to the current market price (there were also warrants to purchase 57.1 million more shares at $10.06 each).
What's more, TPG was savvy enough to negotiate a juicy anti-dilution clause; that is, if Wamu's stock price fell, the fund would get more shares.
The problem: with the plunge in Wamu's stock (to $2.12 per share), there will be a deluge of more shares to hit the market.
Well, according to a piece in the NY Times, it looks like TPG is going to forgo the antidilution clause (assuming the company needs to raise more capital, which seems like a good bet). Unfortunately, this is yet another sign of the rapid deterioration of the financial sector – and how the so-called "smart money" can get things very wrong.
Lately, there have been signs that private equity powerhouses are getting push back from investors. Look at the Blackstone Group LP (NYSE: BX). In the raise of its latest fund, California State Teachers' Retirement System (Calstrs) invested a mere $250 million. Keep in mind that the pension invested $1.7 billion in Blackstone's prior fund.
However, not all private equity operators are having trouble. Take TPG Capital. The firm is apparently in the process of scooping up $30 billion (this is according to The Wall Street Journal). In fact, about $20 billion will be allocated to TPG's leveraged buyout fund. Who said buyouts are dead?
So why the optimism? Part of it is timing. After all, TPG started its capital raising process earlier.
Another key reason is that TPG has a stunning track record. Since 1985, the internal rate of return is roughly 55% (yep, this is something to get investors excited about).
Infrastructure assets can be stable, long-term investments, and as a result, private equity firms are certainly interested.
In fact, TPG has joined Global Infrastructure Partners – a joint venture of Credit Suisse and GE Infrastructure (NYSE: GE) – to make a preliminary $6.5 billion bid (when you include the debt load) for Asciano, a port and rails infrastructure firm based in Australia.
Actually, TPG has had a mixed performance with Australian deals. For example, the firm was unable to pull off its $11.1 billion buyout of Qantas.
Yet, now the markets are much different, and infrastructure operations definitely need cash – which is tough to get in the current credit crunch.
Asciano has about 8,000 employees and generates $2.5 billion in revenues. Some of its key assets include bulk export facilities, four leading container terminals, Stevedoring equipment and rail operations for freight and commodities. There are also joint ventures, such as Patrick Autocare (processing, storage and distribution of motor vehicles).
Of course, Ascaino has already rejected the buyout offer, but it's going to be tough to get a much higher bid, especially in light of the company's heavy debt load and weak operational performance over the past year.
While there were challenges, it looked like Texas Pacific Group would snag a 23% equity stake in Bradford & Bingley PLC, a UK mortgage company. True, the deal was highly dilutive, but at the same time, B&B has been suffering from the credit crunch.
Now, TPG has walked away and instead, a syndicate of investors has rounded up $793 million to bolster B&B. Apparently, the company will need to raise even more capital.
Why? Basically, Moody's Investors Service downgraded the debt of B&B because of rising mortgage delinquencies and continued balance sheet problems. As a result, the economics of the deal changed significantly. In fact, TPG had negotiated an "out" clause for such a scenario.
Actually, the deal implosion points to the fact that the credit crunch is global. It even appears that things may be getting worse, especially in Europe, where there may be a need for many more capital infusions for the financial services sector.
TPG is causing some consternation in the UK. You see, the private equity firm has agreed to invest £179 million in Bradford & Bingley (B&B), which is a beleaguered financial institution.
Essentially, B&B investors are worried that TPG has structured an airtight deal to prevent other bidders from coming to the table. Another concern is an antidilution clause (which protects TPG if B&B's stock price falls).
In fact, shareholders will vote on the deal on July 7th. So yes, there should be some drama.
And, TPG isn't taking any risks. Actually, the firm plans to go on a major roadshow with investors. I'm sure it will be intense – but helpful.
However, it looks like B&B is in a tough spot. In light of the deterioration of its business, the firm needs to work fast. And, if the TPG deal falls through, it's a good bet that B&B's stock price will go into a tailspin.
Wachovia (NYSE:WB) is recently down 87c to $15.35. WB call option volume of 56,113 contracts compares to put volume of 37,393 contracts. WB July option implied volatility of 100 is above its 26-week average of 54 according to Track Data, suggesting larger price movement.
Washington Mutual (NYSE:WM) is recently up 20c to $5.00. WM entered into a definite agreement to raise $7 billion through direct sale of securities to TPG Capital and other investors on April 8. WM call option volume of 41,183 contracts compares to put volume of 14,010 contracts. WM July and August option implied volatility of 133 is above its 26-week average of 76 according to Track Data, suggesting larger movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Back in 1992, Steve Feinberg started a small private equity firm, Cerberus Capital Management LP. It was actually a tough time in the markets. But not for Cerberus. After all, it focused on distressed deals.
Now, the firm is putting together a fund to focus on distressed opportunities in foreign markets (this according to Reuters). After all, the credit crunch is a global crisis -- as seen in places like the UK and even Asia.
In fact, the new Cerberus fund will look mostly at financial services companies, which need lots of capital.
All in all, it's a smart move -- and should produce nice returns. Moreover, Cerberus has strong leadership to pull things off. For example, the chairman of the firm is John Snow, who is the former Treasury Secretary and has a golden Rolodex.
It also looks like Cerberus may raise capital from sovereign wealth funds. Keep in mind that TPG recently snagged $2.5 billion from China for its new fund.
Last year, the Chinese government invested a cool $3 billion into The Blackstone Group LLP (NYSE: BX). It was before the IPO and seemed to be a good bet.
Of course, it wasn't. The shares of Blackstone have plunged since.
Despite this, China is still hungry for private equity. In fact, according to a report in the Financial Times, the State Administration of Foreign Exchange of China has agreed to invest $2.5 billion in TPG's latest fund (which may reach as much as $20 billion).
Simply put, China is overflowing with cash, so why not seek out higher returns?
True, private equity is ailing right now, but then again, the investment horizon is for the long-term. And with lower valuations, private equity firms are positioned nicely to pick up some attractive buyouts.
Something else: TPG has a strong track record. And, by all accounts, the firm is continuing its winning ways, such as with its latest score in selling Alltel to Verizon Wireless, a joint venture of Verizon (NYSE: VZ) and Vodafone (NYSE: VOD).
Traditionally, strategic buyers have an edge over financial buyers (that is, private equity funds). Essentially, they have the advantage of revenue and cost synergies. However, when debt became dirt cheap over the years, financial buyers had a big advantage and were able to out bid strategic bidders.
Of course, with the credit crunch, this is over. And, yes, strategic buyers are coming to the table – and even talking to the portfolio companies of private equity funds.
The U.S. isn't the only place with an ailing financial system. The U.K. is also having some problems.
Take a look at U.K. mortgage lender, Bradford & Bingley Plc. The firm was aggressive on high-risk mortgages, and, as a result, there has been a plunge in profits.
To deal with the precarious situation, Bradford & Bingley has agreed to a $353 million investment from TPG, which is a mega private equity firm. That represents about a 23% equity stake.
Unfortunately, the ailing housing market in the U.K. appears to be far from over. As a result, we'll likely see other capital infusions of financial services firms.
This is certainly good news for TPG. After all, the firm has a long history in restructurings as well as financial services (for example, TPG helped structure a variety of deals for failed S&Ls during the late 1980s).
In fact, TPG is in the process of raising a $7 billion fund for financial services firm.
Back in the 1980s, David Bonderman was the chief dealmaker for Robert Bass, a Texan billionaire. He helped to structure the $550 million buyout of American Savings and Loan Association of California, which was caught in the S&L morass. It was a complex deal, requiring lots of negotiations with federal regulators. But it ultimately turned out to be a great investment. In fact, the bank became a vehicle to finance other deals.
Well, Bonderman is coming back to the future. Now, as the chief of TPG, he's one of the top players in private equity. And he wants to do some finance deals. To this end, he's raising $7 billion for a financial service fund. The investments will range from minority stakes to control situations.
Actually, Bonderman has already been busy with bank deals. For example, he recently assembled the $7 billion equity infusion for Washington Mutual (NYSE: WM). He also approached Merrill Lynch (NYSE: MER) to do an investment, which, so far, hasn't gone anywhere.
Yet, there are many financial institutions that need cash. Moreover, having TPG as a partner is usually a good thing.
As should be no surprise, it looks like TPG is getting traction on the capital raise, with commitments from the New Jersey State Investment Council and even the government of Singapore.
Of course, the subprime crisis is a key element of the credit crunch. But there has also been another force: the huge build up of leveraged loans for mega buyouts.
Well, with the help of sovereign wealth funds -- and even some private equity firms, like TPG -- the subprime problem appears to be improving. And, interestingly enough, it looks like banks are also effectively dealing with the leverage loan overhang. This according to a piece in FinancialNews.com.
Basically, the backlog is now at $91 billion (which is a drop of nearly 60% so far this year). But we are already seeing signs that banks are opening up to new loans, such as with Basell's buyout of Lyondell Chemical Company. The major banks need the deal flow from private equity firms because of the juicy fees. So it's no surprise that we've seen a lot of action in getting things moving again.
This week, some of the top veterans in private equity -- TPG's David Bonderman, Carlyle's David Rubenstein, and KKR's George Roberts -- got together at a conference in Hong Kong. And, all in all, it was fairly depressing (hey, I guess that's what happens when you lose billions and billions of dollars).
In short order, the shareholders of 
and 
. He is also the founder of 
Even for the tier-1 private equity operators, a $1.3 billion loss is a big deal – especially when in comes in about five months. This is what 
Infrastructure assets can be stable, long-term investments, and as a result, private equity firms are certainly interested.
While there were challenges, it looked like 
Wachovia
Back in 1992, Steve Feinberg started a small private equity firm, 
. He also operates 
Traditionally, strategic buyers have an edge over financial buyers (that is, private equity funds). Essentially, they have the advantage of revenue and cost synergies. However, when debt became dirt cheap over the years, financial buyers had a big advantage and were able to out bid strategic bidders.
Back in the 1980s, David Bonderman was the chief dealmaker for Robert Bass, a Texan billionaire. He helped to structure the $550 million buyout of American Savings and Loan Association of California, which was caught in the S&L morass. It was a complex deal, requiring lots of negotiations with federal regulators. But it ultimately turned out to be a great investment. In fact, the bank became a vehicle to finance other deals.
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