WaMu: The Worst Deal in Private Equity History?


Updated Before I get into this, three quick caveats: (1) I just left our Seattle Shindig, after consuming a plethora of Red Stripes; (2) I’m sitting at the airport awaiting a red-eye back to Boston; and (3) I’ve slept fewer than five of the past 48 hours. Oh, and I’m officially off ’till Monday. Moving on…

Private equity firms have done hundreds of lousy deals over the deals, including such notable duds as Refco and Atkins Nutritionals. But it would be hard to find a single one worse than TPG Capital leading a $7 billion capital infusion earlier this year for Washington Mutual, which has just agreed was forced to sell itself for scrap to JPMorgan. TPG and its equity co-investors are being completely wiped out, less than five months after first making the investment.

This is a real “bloom coming off the rose” moment for TPG Capital, which was viewed by many as the world’s savviest private equity firm. There were immediate concerns when TPG originally announced the deal, particularly due to widespread speculation that due diligence was rushed because of WaMu’s pressing need for capital. “The real saving grace was that [TPG co-founder] David Bonderman had once been on the WaMu board, so I think that gave everyone a certain comfort level that TPG already had deep knowledge of the company’s strengths and weaknesses,” someone said to me tonight. “But clearly it was a disastrous move.”

Again, to reiterate: $7 billion lost in five months. Few private equity deals in history have even included that much equity, and I don’t believe any of them have been written-off.

It is worth noting that TPG Capital only put up $2 billion of the $7 billion, with most of the remainder filled by existing WaMu shareholders. There has been wide speculation, however, that some of TPG’s limited partners may have doubled down via co-investments. I’ve put in a call for confirmation on that, but am not expecting to hear anything until I land in Boston. Either way, they followed TPG’s lead to a horrible end. [Update: A source close to TPG says that the firm’s actual investment ended up totalling just $1.35 billion, and that its LPs did not participate at TPG’s behest, although some of the institutions may have been existing WaMu shareholders who participated].

Nitpickers may argue that this can’t be the worst private equity deal in history, because it was a PIPE (private investment in public equity) rather than a traditional PE transaction. But it’s a distinction without a difference in this case, and TPG now lays claim to the most dubious of titles.

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