Private equity firms have been champing at the bit, looking for some way to take advantage of depressed valuations. They have capital in the midst of a liquidity crisis, which ought to set them up to make a killing. Without financing for their bread-and-butter IPOs, however, they have been fishing for alternative opportunities, so far without much success.
The Feds appear to be riding to the rescue, according to
The Wall Street Journal and
The New York Times, which report Monday that Treasury Secretary Tim Geithner will disclose plans Tuesday, as part of the revise bailout plan, to enlist the help of buyout firms and hedge funds.
Don't expect to see a lot of bailouts of whole institutions, along the
lines of the $13.9 billion purchase last month of the failed IndyMac
Federal Bank from the Federal Deposit Insurance Corp. by JC Flowers
& Co. LLC, Dune Capital Management and hedge fund Paulson & Co. Fed
caps on financial sponsor ownership still get in the way. Moreover,
banks in need of a bailout tend to be either too big for big for
private equity and hedge funds to take on (think Citigroup Inc.) or have
weak franchises and thus have little appeal. The memories of the
disastrous investments by TPG Capital in Washington Mutual and by JC
Flowers in Germany's Hypo Real Estate Holding AG will deter others from
any similar bailouts unless regulators agree to take on more of the
risk.
The bigger opportunity for buyout and hedge firms may be in distressed
debt assets. The Journal and Times suggest that the Feds want to get
the market moving again for debt products, which have collapsed in
value as trading has effectively ceased. The government could tap more
firms because no one firm would have to commit a huge slug of capital
to play in this game. If the government offers some kind of backstop to
limit the downside, there will be no shortage of buyers ready to help
re-establish rational markets and pricing.
- John E. Morris
