I was on CNBC this morning to discuss how hedge funds are forming side vehicles to invest in public companies that already have agreed to go private. As I’ve been saying for over a month – almost all of these deals will get done, so such a strategy is smart (although would have been smarter three weeks ago).
After all, there are three parties involved in such deals, and each has strong incentives to close the deals. First is the seller, which wants to sell because it got an inflated price. Next is the bank, which could suffer a major blow to its reputation. Dennis Berman of the WSJ argued back on this point this morning based on the Home Depot situation, saying that banks could just plead macro conditions outside of their control (credit & housing troubles). He may be right, but doesn’t that mean banks are saying to potential clients: “You can trust us in the good times, but in the bad times you’re on your own.”
The third party is private equity firms themselves, and there has been some talk that they might want to back out of overpriced bids. But here’s one big reason why they won’t: Their LPs would be forced to pay the reverse breakup fees, according to standard buyout fund terms.
Imagine TPG or Flowers or CD&R going to their investors with the following: “We made a really bad decision and now need you to bail us out via a capital call.” Say goodbye to the next fund…