Don’t Trust S&P Reports on Private Equity, PEC Says

The Private Equity Council has a bone to pick with S&P’s recent string of reports, which tracks the “Traces of Private Equity DNA” in defaulting companies.

The problem, according to PEC, is that a list compiled by S&P looks at non-control stakes, which make up the majority of the PE-backed defaulters. Whether or not to blame a minority shareholder for a default is one thing, but S&P actually included at least one company that didn’t even have PE investment at the time of default. PEC called the analysis “strained.”

S&P’s latest report, which got media attention here and elsewhere, shows that 53 out of the 86 S&P rated defaulters are “related to private equity.” According to PEC’s investigation, only 22 companies had PE control stakes. I think this is a valid complaint, evidenced by an in-depth document (view it here) outlining S&P’s “promiscuous” definition of the word private equity. The PEC list of 22 defaulters is available here.

Lo and behold, S&P included companies that were given rescue financing from a PE firm, companies that saw a PE firm bid on them but not buy, companies which PE firms invested in the debt, companies that are backed by corporations, and public companies where PE firms own less than 5% stakes. Touché, private equity.

For our part, peHUB would like to point to our latest rendition of the PE-backed bankruptcy list, which has a grand total (of all companies, S&P rated or not) of 45. Since last posting, two more have been added to the list, Special Devices Inc, owned by J.F. Lehman & Co., and CDX Gas, owned by TCW Group. It can be downloaded here, or email me for a copy if you don’t subscribe to the peHUB archives.

I’d like to weigh in on this debate and say I don’t think these studies can prove whether or not private equity is a legit asset class (it is) or evil (it can be, but usually isn’t). I also don’t think job creation studies really help or hurt private equity’s image, either, since the question will always remain: What would those companies have done without the intervention of private equity? Would they have survived? Grown? Withered? Gone Bankrupt? Laid off the same amount of people? Done a sale-leaseback? Outsourced manufacturing? It’s impossible to know.

Ernst & Young does an annual survey that attempts to show whether or not private equity creates value. Since its beginning three years ago, the survey shows that PE has. I maintain that the best measuring stick would be to measure a company’s performance after the PE firm exits. As I asked earlier this year:

Is the value creation permanent and sustainable? Did the company wilt without the PE firm’s pressure, best practices, and drive for improvement? Was the company overburdened with leftover LBO debt?

For background, the Private Equity Council is a lobbying group comprised of the following firms: They are Apax Partners; Apollo Global Management LLC; Bain Capital Partners; the Blackstone Group; the Carlyle Group; Hellman & Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake, THL Partners; and TPG Capital (formerly Texas Pacific Group).


Three Weeks To Go: 45 PE-backed Bankruptcies

Default Update: Percentage of PE-backed Bankruptcies Falls, S&P Reports

S&P Credit Commentary Blames, Excuses PE For Defaults