Dark Times for Public PE, But Don’t Expect Any Take-Privates or Dividends

Massive write-downs and horrific stock prices de damned. Today’s earnings calls for BDCs like Allied Capital and American Capital echoed what we heard on Blackstone Group’s recent call: “We’re not going private anytime soon, and we’re not paying any dividends for a while.”

American Capital announced it was in violation of covenants for the second time in the past year. During its dismal two-hour call, analysts lamented that the company’ stock price reflected future (and larger) writedowns, and that it ruined the company’s ability to maintain its asset coverage ratios. Even individual investors got on the line to complain.

Eventually someone asked point-blank: Do you think the BDC is the best structure for American Capital going forward? Would you consider going private? CEO Malon Wilkus said, “No… Last year we conveyed we had to evaluate our structure, but in this environment it’d be hard to explain that to lenders.”

The same question came up on Allied Capital’s call. The firm — which is being advised by the one profitable arm of Blackstone Group — is in negotiations with lenders over a violation of its covenants in January. An analyst asked, “Is one of the options being discussed kind of changing the structure away from being a BDC?”

Allied CEO Bill Walton replied, “We want to create a capital structure that works in the BDC format. People have come to us with a lot of different ideas about structure, but it’s way too early to begin thinking about whether that makes any sense or not. We think we can fix this capital structure issue within the context of the BDC model.”

Blackstone’s leaders Steven Schwarzman and Tony James echoed similar notes on a media call last Friday. Schwarzman complained of his firm’s “dim-witted” stock price. When asked about throwing in the towel on the whole public company charade, James said, “We went public for a reason, and without it we wouldn’t have been able to acquire GSO or have our China partnership, or the ability to recruit talent…. We believe it will give us the fuel to make Blackstone a global financial institution, to be the Goldman Sachs of our business to so speak. So we haven’t given up on those dreams.”

He instead said the firm would think about buying back shares if the stock got low enough, but never to the point of going private.

As public companies, there is some pressure to pay a dividend or distribution, but this quarter not many in the financial sector did so. American Capital doesn’t expect to pay one for the rest of this year. Allied Capital met its dividend but said it won’t expect to pay any more in 2009 since it is in default. Blackstone Group didn’t pay its quarterly distribution this quarter or last quarter, but says it expects to pick that back up in future quarters.

The only reporting firm not worrying about dividends is KKR, because it’s not yet public. If the delicate wording of its announced earnings is any indication, that “private” status may not change after all. KKR is evaluating the “continued advisability” of its previously announced reverse IPO. I’m pretty sure that’s press release-speak for “RETREAT! RETREAT!” But I’m sure that without a recession-friendly advisory business like Blackstone’s to carry, KKR is happy to retreat in private than be forced to lick its wounds publicly.