Private Equity Deals

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2300

According to the second annual conference at Wharton on private equity ("Navigating the Challenges Ahead"), summery data released this week by K@W, financial sponsors are scrambling to prepare for refinancings that will start coming onto markets in 2012. The article attached on "The Coming Wall of Refinancings..." refers to a panel discussion at that conference on what has to be done by private equity firms to get their portfolio companies viable in time for debt restructuring.

For some private equity firms, I see no hope. Cerberus comes to mind having, in 2007, obliged Daimler by "stealing" Chrysler from them for $7.4 billion (and a 20% ownership stake that Daimler kept until recently). Since Daimler had paid $38.4 billion for Chrysler at purchase in 1998, that deal has to rank as one of the worst ever. Cerberus, thinking that the dramatically lower price for Chrysler would allow a good return on the investment, also bought 50% of GMAC. That deal was literally made (with the $20 billion that Cerberus borrowed) two weeks before the credit markets froze up at the end of 2007. It was the last big deal. It proved that private equity firms could buy just about anything in loose credit markets and it gave Dieter Zetsche a chance to turn Daimler around. But, Cerberus was left holding the bag.

Jack Daly, managing director of Goldman Sachs' principal investment area, put the credit crisis in historical perspective, noting that 2007 and 2008 represent sharply different markets. In 2007, the market was robust, with easy access to credit, liberal loan covenants, and the possibility of a $100 billion buyout. By the end of 2008, everything was different. Quoting Daly, "Today, we have no credit market, life has changed, buyout multiples have dropped and deal volume is down 75% since 2007."

Private equity is an indicator of how business is doing overall so it is worth watching. Forced divestitures will provide opportunities for the leaner private equity firms to buy up desirable businesses. Major companies under pressure, such as AIG and Citigroup, will need to unload profitable businesses at valuations that will be attractive if they are going to survive.