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Wall Street’s Short Memory on Private Equity

When the leveraged loan credit markets seized up this summer many Wall Street banks were stuck holding the bag on financing commitments they had made to Private Equity firms for LBOs.  The Street couldn’t sell the paper so they had to take the loans down onto their own balance sheets and write the bridges themselves.  Since that time the market has improved slightly but many offerings have still been postponed multiple times and most that are offered are being offered at steep discounts to par to entice investors.  Many traditional investors in leveraged loans and bank debt, like CLOs, don’t have much extra capital to deploy since they were probably badly burned by CDOs and needed to sell other assets (i.e. leveraged loans) to meet margin requirements on falling mortgage positions.

It is safe to say that the mega-buyouts we have been seeing over the last few years are gone for awhile.  Sponsor activity will be much lower in 2008 and this will have a negative impact on investment banking activity and revenue.  Keep in mind that private equity firms are the most lucrative clients for investment banks because they do so many transactions.

              

 

 

 

 

 

 

Kravis of KKR

This summer when the leveraged loan markets closed many banks started to re-negotiate their commitments to the private equity clients for LBOs that were in the pipeline.  Some private equity firms played ball and some didn’t.  Those that played ball thought it was better to give in on terms to win favor with the investment banks and to stabilize the market for LBO related bank loans and high yield debt.  Many of these private equity firms even went out and bought high yield debt and bank loans, when they were trading way off of par, in hopes of realizing a profit when the market realized that it had punished these LBO credits too much.  Some firms didn’t play ball and many a senior banker kept saying that these firms would be punished next time the credit markets opened up.

I don’t really believe that for a minute.  Once the PE firms start paying fees again, there is no way that firms like KKR, that was ruthless on terms, are going to get shutout. It may be the case that they don’t get the most aggressive terms going forward or don’t get first look on sell-sides, but they are still going to get kid glove treatment by The Street.

 

 

 

 

 

 

 

Schwarzman of Blackstone

In a similar vein, I don’t think that Private Equity firms walking away from buyouts right now will hurt their ability to do deals in the future.  Goldman and KKR walking away from Harman and Cerberus walking away from United Rentals (at least trying to walk away before the legal battle began and a settlement appeared on the horizon), is not going to stop private equity from concluding deals in the future.  When the LBO cycle kicks back into high gear business sellers are going to be motivated by how much money they are going to get from the highest bidder.  If that happens to be a private equity firm, they are not going to shut out the PE firm because the PE firm wants a MAC and a low break-up fee.  Wall Street has a short memory and so do shareholders of companies on the block.  Money talks and bullshit walks.  Private equity firms’ money will continue to talk and the wall street firms and sellers are not going to walk away.

© 2007 Prince of Wall Street.