Wednesday Warblings


The sun is shining, the State of our Union depends on who you ask and KKR was apparently jealous of Blackstone doing that Deutsche Telekom PIPE last year. In other words, it’s time for some Wednesday Warblings…

First up are some responses to yesterday’s column, which suggested that the private equity party might be approaching last call. Joe kicks it off with: “One thing to consider Dan is the cost of SOX compliance. This is NOT a synergy (or at least not a strong one) for strategics. However, for going private, the cost savings can be significant.Of course, any private that is thinking about returning to the public sector will prudently maintain some SOX frameworks remain in place.” So considered Joe, but you are correct in saying that any mega take-private must keep a lot of compliance mechanisms in place for subsequent re-entry into the public markets. I’d say a bigger concern is senior executive compensation, which often rises in take-privates because there won’t be any analyst/shareholder/media complaints.

Michael: Interesting editorial, but I think you’ve missed the mark… PE returns are getting lower, but let’s be honest, the pools of capital (i.e. dumb LP money) have to put it to work somewhere, just like the GPs do. The returns for GPs are so much greater than returns for LPs that there is no reason that the GPs will stop. Second, large LBOs are less risky than small ones (think of US Treasury’s compared with a something issued by a third-world nation) so the returns should be lower anyway, and you can probably get to a risk appropriate return even with heavy financial engineering, which may be lower than the historically experienced IRRs.”

Stu: I agree that the ‘bubble’ in LBOs will come to a different end than the VC bubble in 2000 – if for no other reason that the LBO folks invest in companies with assets and revenues rather than eyeballs and hoopla. But won’t the sheer volume of capital inevitably drive down the returns? Both because of the competitive pressures that you described yesterday, but also because the exit volume isn’t there? If you look at the volume of capital now up for deployment and make some assessment about the returns that would make LPs happy and run the math forward… where are the exits? I don’t think there’s going to be a “crash” here but I worry that a lot of funds will be holding large private or public positions that they can’t liquidate – that will tie up the funds of their investors for a long time – probably 5-7 years and result in a much lower set of returns.”

*** An anonymous reader summed up the responses to Tim Draper’s musical performance last week at Wharton: “Tim trotted out the same song at the HBS VC/PE conference in 2005. Sorry to hear that he’s continuing to inflict it on hapless, wide-eyed conference attendees.”

*** Some responses to last Tuesday’s piece about knowledge process outsourcing, related to Adventity raising $20 million from Norwest Venture Partners. Manish writes: “One of the dirty little secrets of the great “Indian growth story” is the lack of true quality people. Being on the ground in India, I see if everywhere.Yes, many Indians have great book knowledge, but practical application is another issue.I’m sure the first few KPOs will do well, but it will quickly lose its great IRR numbers once everyone piles into the space.”

Zakeer: “Your comment – ‘Wall Street analysts beware: Your jobs could soon be outsourced’ exaggerates the truth. Outsourcing is not going to replace the job of an analyst; there is a limit to what an analyst can do, sitting far away from the market which he/she needs to track. The real insights in to the company come from speaking and meeting with the management of the company, suppliers, buyers/users etc and this is what an outsourced analyst will not be able to do. The outsourced analyst can help in building and updating the models, write the reports and do all the secondary research. The real threat is to the junior analysts and here also they can not replace them completely. However this trend of outsourcing certainly opens up new opportunities for both parties. On one end the I-Bank analyst gets the cost advantage, 24/7 support and new ideas which are not influenced by Wall Street hype. On the other end the guy sitting in India gets to work with the best brains in the world and the job pays well compared to Indian standards.

*** Matt was one of many variations on the same theme: “No mention of the Pats? I heard they finished second on Sunday…” They lost? No Matt, you must be mistaken. They were winning with just a few minutes to go…