Standard & Poor’s recently released a report titled “Global Credit Comment: Exposure to Deteriorating Assets Increases Risks To Private Equity.” It’s not unlike prior reports the firm has released titled “Private Equity Swirling In The Eye Of The Storm” and “Default Autopsy Finds Traces of Private Equity DNA,” both of which I’ve been equally critical of.
This report states that more half of the 293 companies on its Weakest Links list “have been involved in transactions with private equity at one point or another.” The Weakest Links list consists of entities rated ‘B-‘ and lower.
If the purpose of the report is the assess risk to private equity, as the title states, then it makes no sense to include companies that private equity has already exited. A buyout fund can’t be exposed to risk on a company it no longer owns.
For comparison’s sake, I’ve looked up the most recent selection of buyout-backed Weakest Links, as culled by a more meticulous research editor at Buyouts magazine. Not surprisingly, the percentage drops from S&P’s “more than half” to just 24% as of the first quarter. By Buyouts’ count, which I believe is a more accurate reflection, 78 of S&P’s Weakest Links are currently backed by buyout firms. S&P’s count, which includes any company that’s ever taken on private capital, is higher than 147.
Even more annoyingly, the list includes repeats! Companies with subsidiaries are listed more than once. For example, Dex Media Inc. (which is backed by a hedge fund and was once owned by Carlyle and Welsh Carson) gets a separate listing from its subsidiaries Dex Media West and Dex Media East.
Beyond that, a quick scan of the list reveals that S&P also did not distinguish between mezzanine lenders and buyout firms, so any company that’s taken a mezz loan (there are a lot) gets lumped in with leveraged buyout targets.
This follows S&P’s prior sloppy private equity reports, including one that incorrectly identified defaulting companies as buyout-backed, in some cases where the firm merely bid on the company, invested in the debt, or provided rescue financing to.
So I caution you, as usual, read this report with utmost skepticism. It’s clearly not designed to convey what it claims to (assessing risk to private equity); rather, it implies that buyout deals are driving the Weakest Links list, and, in turn, defaults. Buyout firms have done silly deals with foolish capital structures that could very well lead a wave of defaults. But as of right now, we haven’t seen proof of it, and frankly, we likely won’t see proof until 2012 when debt from the mega-deals matures. In the meantime, S&P needs to stop trying to manufacture their own.
Download the report, with a somewhat difficult to read list of its 76 Weakest Links here: gcc_pe_wl-d