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Private equity takes many companies private

Page history last edited by PBworks 15 years, 8 months ago


 

see also:  Private equity,  invest 

 

 

Why do private equity funds look for publicly owned companies to "take public"?

 

there are two main arguments here:

 

1.  Because private equity investors are more long-term focused, that allows managers to focus on long-term strategic decisions.  This is opposed to the stock market (publicly traded) where managers must fight to meet quarterly earnings targets.  The theory is that the focus on meeting Wall-streets expectations leads companies to focus on the short term.   This is controversial

 

2.  Because of Sarbanes-Oxley Act in the USA.  In response to the additional regulations, it became more cumbersome to run public companies (board room members too more time focusing on compliance, and less on strategy).  So, companies had the incentive to go "private".

 

 

Trends:

 

One of the more interesting mega trends that has occurred over the past few years is that Private equity companies have increasingly taken a vast number of companies private.  This means that they are no longer listed on the NYSE or NASDAQ, and therefore what happens inside of the companies is now secretive, rather than public information.  The benefits of going private are advertised as being great:  companies are no longer needing to meet short term investors expectations, and so they are free as a private company to make longer term decisions without having to meet wall streets expectations each quarter.  Also, some argue that by going private, the companies are no longer overly burdened by regulations and expenses that arose from the passing of Sarbanes-Oxley (a new law put in place after the collapse of Enron, WorldCom, and other scandals in the early 2000's).  But, while these arguments may be true, there also seems to be something else going on here.  Private equity funds have been very successful in raising massive amounts of money (billions) which has allowed them to raid public companies and take them over.  In the past, there might have been public outcry, but in the Sarbanes-Oxley world (and with everyone getting rich from buyouts), there has been very little public outcry. 

 

 

 

Slowdown in early 2008...

 

What happened?

 

But, what happens behind doors is out of sight of the public.  Is this worrisome?  As this trend was escalating with no potential end in sight, all of a sudden, the credit crisis of 2007 came along (caused by the housing bubble bursting, and the subprime lending), and all of a sudden, the private equity guys were having trouble finding the credit needed to close on many of these deals.   If private equity takes a breather, will this open up the door once again for strategic corporate mergers and acquisitions?  It is an interesting trend, and if you want to comment on it, please click feel free...

 

 

Private Equity Trends in early 2008

 

The question of whether or not mega-firms and large firms would begin competing for the same deals – particularly given that no one expects many $5 billion+ deals in the near future. The answer was negative from all involved. That may mean that the large-market firms move a bit further downstream, but the primary argument was that the Bains and Blackstones of the world can’t justify too many $100 million or $200 million equity checks.

 

 

*** Middle-market buyout shops have been hit hard by the credit crunch, despite much crowing to the contrary. The conventional wisdom had been that covenant-light structures had only been extended to mega-firms, but both Callaghan and Mannion disputed that assertion. They also pointed out that the middle-market lenders are now having far more troubles than had been originally expected, despite their non-syndication strategies.

 

 

*** Covenant-light is dead. But I think we already knew that.

 

 

*** Bekenstein had the line of the afternoon, in response to a question about access to leverage: “It’s easy to borrow at 0x EBITDA. Any higher than that is very difficult.”

 

 

*** All four panelists believe we either are already in a recession, or will be in one by year’s end. I also asked that question of the audience, and only one attendee played contrarian. From my calculations, that’s 99.9% who expect recession.

 

 

*** The panelists agreed that private equity has done a lousy job of PR over the past year, although Greenthal emphasized the catch-up formation of the Private Equity Council. I asked the middle-market folks about why they don’t have any lobbying representation, particularly since there are so many more of them than there are mega-funds. Marty Mannion’s response was revealing: He cited the carried interest tax situation, and how venture capitalists tried to cleave themselves off from the mega-buyout folks. Middle-market investors, Mannion said, haven’t been able to decide which side they’d like to align themselves with.

 

 

*** We talked a bit about internal accounting, since PE firms are now required to mark-to-market. This is something the big firms have done for a while without incident, but there is definitely some apprehension among the mid-market ranks.

 

 
*** Greenthal suggested that one reason for reduced deal-flow is that public companies haven’t yet internalized their reduced stock prices. There’s a lag, she said, which means that a company trading at $25 per share might not accept a $32 per share offer – because it has a 52-week average of $31 per share. That could take another six months to shake, she said. Kind of reminds me of VC-backed entrepreneurs after the Internet bubble…

 

 

Sovereign Wealth funds in 2008

 

Rather than private equity, we are now seeing soverieng wealth funds taking the front stage

 

 

 

 

 

 

 

Links

 

 

 

 

 

 

 

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