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 Private equity firms may be feeling a bit like Al Capone nowadays (without all that criminal activity of course), as it won't be rivals or law enforcement that ensnare them, but their own sharp-penciled accountants. Thanks to the magic of mark-to-market accounting rules, LBO shops are preparing to give their limited partners the bad news of just how much those portfolio companies they bought in the boom years are worth during a credit crisis and recession. According to the Financial Times, the reported drop in valuations will be around 20% to 30%, as buyout shops undergo some of the same write-down pain the banks have endured for the last 18 months. And as bad as a 30% markdown sounds, there are almost certainly going to be plenty of portfolio companies whose value has fallen even further than that. Leveraged buyouts done in late 2006 and 2007, when easy financing terms allowed private equity to shell out big premiums and load the company up with debt, are the mostly likely candidates to cause that kind of grief. Megabuyouts such as $48.5 billion for BCE Inc., $43.8 billion for TXU Corp. and $25.8 billion for Hilton Hotels are likely to be causes of great pain for LBO firms in the short-term. The FT writes: In the past, private equity firms had the luxury of valuing the companies they bought at cost until they sold them years later. But today the buy-out firms have been forced to adopt more rigorous accounting...With public markets down about 40%, the equity [in PE-backed companies] may well be worthless today - save for the fact that the private equity firms have years to try to restructure and restore value to their companies.Therein lies the saving grace for private equity, who unlike their publicly traded banking brethren, have investors that came in knowing the it was a long-terms asset class. Nor can limited partners simply dump their stakes in the investment funds on a stock exchange; they would have to turn a the secondary market already poised to do record volume in 2009. Private equity firms will be able to weather the storm of write-downs, awkward capital calls, portfolio companies bankruptcies and the like. But it's in raising new investment funds that they're likely to have their toughest test. With IRRs down in the dumps and the traditional limited partners already strapped for cash because of losses in equity and bond markets, private equity firms that deployed most of their capital when valuations were high may be facing mission impossible when they hit the road to raise new money. - George White See FT story See story on secondary markets on The Deal.com See story mark-to-market accounting on The Deal.com See Deal Watch on PE-back bankruptcies See Deal Watch on PE/VC fundraising CategoriesCommentsPrivate capital video
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C'mon, when will journalist look over the wall?
Yes PE valuations will drop 20-30% as of December 2008 because of the fall in public comparables that are used to value them. But during y2009, the business performance of the underlying companies will also fall down (whereas most of y2008 was not that bad for them, at least first half).
So there will be more adjustments and PE firms will not be able to shun these...unless they dig their heads in the sand..but how long one can do that for?