Monday, October 06, 2008

1/4 Equity + 3/4 Debt = The Next Great Collapse?

If you're like me, the world of private equity firms is about as important as the price of polo pony food.

But, for some reason, an opinion column from Canada scared the bejeezus out of me this morning.

Here's a snippet:

Take Realogy, formerly Cendant, the world's largest real estate franchisor, whose businesses include Century 21, Coldwell Banker and Sotheby's International Realty. Its debt trades at about 75 cents (U.S.) on the dollar, a level that implies a fairly high chance of default.

This is bad news for Leon Black's Apollo Management, one of the world's biggest private equity firms. Its purchase of Realogy, completed in the spring of 2007, when the buyout frenzy was at its height, valued the company at $8.5-billion. It's safe to assume Realogy is worth considerably less today as real estate values go into the tank.

While the partners of private equity firms were built up as swashbuckling captains of capitalism, the reality is that their business model was dead simple: Goose investment returns by buying an asset with as little equity as possible.

They could do so because loans were cheap and plentiful, and rising markets kept the credit spigot open. Typically, private equity firms financed LBOs with one-quarter equity and three-quarters debt, though many were done with much thinner equity layers.

LBO = Leveraged Buy Out (s)

There's more, though:

Two of the biggest LBOs of the decade have run into trouble. Tribune Co., the media company taken private last year by real estate magnate Sam Zell, has $1.4-billion in debt coming due next year, and is seeking to sell the Chicago Cubs baseball team in a bid to raise $1-billion. Cerberus Capital Management LP bought control of Chrysler LLC last year for about $7-billion, but has not been able to stanch the company's losses.

Private equity managers say things will get a lot worse before they get better. Some truly big LBOs could blow up, spreading wreckage everywhere. For investors such as Cerberus and Mr. Zell, the golden age of private equity - all three or four years of it - has come to an end.

Fasten your seat belts.

This could get really ugly really fast.

Number of days since Donna Brazile promised to leave the party if superdelegates decided the Dem nominee:

Donna has known for a long time now that superdelegates would be necessary for any Dem candidate to win the nomination this year. Ask Donna when she intends to keep her promise.
Don't hold your breath awaiting a reply.

Here's Donna now...

"For the great majority of mankind are satisfied with appearances, as though they were realities, and are often more influenced by the things that seem than by those that are."
-Niccolo Machiavelli (1469-1527)

Best bar bet in the world: Delilah didn't do it.
Judges 16:19-- and and


Blogger Double Jointed Fingers said...

Do these firms ring a bell? Especially Carlyle and Blackstone, not to mention Goldman:

According to Private Equity International magazine, the top 20 private equity firms (including Ontario Teachers' Private Capital) each raised between $10-billion and $32-billion in capital in the five years to 2007. The top five were Carlyle Group, Kohlberg Kravis Roberts (KKR), Goldman Sachs Principal Investment, Blackstone Group and TPG.

8:13 AM  

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