For years private equity firms have argued that their industry helps the economy by making their portfolio companies leaner and more competitive as they cut away the fat. Now the Prince of Wall Street sees the credit crunch doing the same to the buyout shops themselves as it separates the wheat from the chaff.
The blogger
writes:
We should welcome the shakeout because it will make distinctions between different private equity funds much more apparent. ...The private equity funds will have to become more creative in how they find deals, structure them, and ultimately operate the companies they buy. For probably the first time in the private equity industry's short history we will see how the largest firms perform on a relative basis during a downturn when plain vanilla LBOs can not be done. The firms that have been claiming they have a differentiating edge will be proven right or wrong. The victors will raise even more money for the next boom and the posers will be closed or reduced to a fraction of their former size. Only the sharpest and the strongest will be rewarded after this winnowing.
While he's almost certainly correct that tight credit is going to make the differences between top performers and nonperformers plainly apparent, it may be years before the full effects are seen, considering how much money LBO shops are sitting on. After three consecutive years of new fundraising records, those firms that haven't committed most of their capital to deals may be able to wait for leverage to return. And as for the megafunds like Blackstone Group, Kohlberg Kravis Roberts & Co. and the Carlyle Group, they may have become private equity's version of "too big to fail." With their track records, massive amounts of capital under management and roster of portfolio companies, it's going to take more than one fund with a negative IRR (however embarrassing that may be for a top-tier firm) to stop the tide of limited partners beating down the door to get in on their next vehicle. -
George White
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