Bailouts for banks are bad news for private equity dealmaking, Guy Hands, the outspoken CEO of U.K. buyout shop Terra Firma Capital Partners, speculated at the Super Investor conference in Paris Thursday. Among his "sky is falling" predictions were restricted lending, layoffs and negative internal rates of returns.
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Bloomberg is reporting that Hands said:
"[Governments] are unlikely to encourage those banks to lend to
private-equity firms, and will insist on tougher terms. Unfortunately,
as recession deepens, the world is looking for scapegoats and we're
most certainly easy targets. ... We've never had it so good in the West, and unfortunately it was all driven by debt and cheap foreign goods," Hands said. "All of us in the West, and our children, will suffer from the coming downturn."
Hands went on to say that his firm has had so much trouble getting financing that it's
only looking at deals that don't require any debt, a decision sure to kill
returns as the private equity model is based on levering up portfolio
companies.
Of course, Terra Firma isn't alone. Private equity firms have already seen their ability to do deals
hamstrung by frozen credit markets. Equity sponsors had major problems getting banks to fulfill their commitments
to provide the debt financing for megabuyouts after the credit crunch
first hit. And for their part, the banks have no interest in repeating what happened in the fall of 2007, when they found themselves
with roughly $350 billion of leveraged debt commitments and no buyers to
syndicate it to.
Hands had other dire predictions for the dealmakers and limited
partners assembled at Super Returns, as he predicted buyout firms would likely cut fundraising in half while returns would plummet into negative
territory. With profits gone, the industry will be slashing headcount,
and "those who remain will be paid substantially
less." - George White
See story from Bloomberg
