The descent has been so rapid, in fact, that it’s almost rendered Michael Wolff’s recent Vanity Fair article on private equity MOA (moot on arrival).
His piece, titled “The Ultimate Bubble,” asks the question on everyone’s mind: Is private equity doomed, to what extent and which specific people or firms? Wolfe nails it when he says: “Chances are that what you’re doing with your idle hours as a PE man is trying to figure out who deserves to crash and burn before you.” (We at peHUB have our money on Apollo going down first, among the big boys)
He makes the point that PE hasn’t crashed yet, because we’ve yet to see much blood in the water, and that’s partly because you all are so damn private. But in the time between his writing the article and it going to press, some of his arguments against a PE crash have now come to fruition! For example, he says, at least PE firms haven’t given money back yet. TPG did so last week. He says PE firms haven’t announced any layoffs. Enter Blackstone, Carlyle, American Capital, AIG, and probably others we don’t know about.
Add that to last week’s dubious BCG study predicting almost half of all PE firms could cease to exist in the coming years. The study was met with a sneer (slightly from me, largely from commenters), yet the idea isn’t that far-fetched. Both Wolff and BCG touch on a topic that may have started months ago as nervous whispers but has amplified to a worried roar and will only snowball in the new year: Private equity firms are in trouble.
So in 2009, expect to defend your industry and reason to exist. There are a laundry list of things working against you right now.
For his part, Wolff blasts PE for pretending to know how to manage companies but actually being quite clueless:
Indeed, the complaint of all companies owned by private equity firms is that, previously left alone by their remote investor-owners, they are now enduring the attention of the private equity guys who have so much less to do (and no idea what they are doing).
Wolff even concludes that private equity is ultimately nothing but precarious trickery, and that the good firms will be able to “bluff it out.”
I disagree. Even though God knows there are plenty of examples to back Wolff up, there are also plenty of firms that know how to manage companies and do have “real operating expertise” (despite how much I tire of hearing them toot that horn). Those are the firms that save companies headed toward a demise or their own making. Some of those firms are ruthless and unpopular, and some of them make gratuitous sums of money in the process, and they’re maybe even arrogant jerks about it, making them tough to admire. Whether or not private equity is doomed for a shake-out is one thing. Whether or not private equity is evil and has a reason to exist is another completely. I think that’ll be my first order of business next year-finding unbiased, bullet-proof examples of private equity firms proving PE is a viable, important investment class. Feel free to send any valid suggestions (I’ll need numbers) here.
Also, I wanted to add a few other highlights from Wolff’s article, which, despite my bone of contention, was good reading that I recommend.
-He points out that we the taxpayers have paid for Blackstone’s buyout of Hilton Hotels, since Lehman and Bear provided the debt for the deal and their debts have been bailed out by the US government. That’s a tough idea to swallow.
-He also touches on the under-reported point that PE firms are looking increasingly like investment banks, with Quadrangle serving as an investment adviser. (A better example would have been Blackstone Group’s distressed advisory practice, which is the only part of its business that’s doing really growing these days.)
-Schwarzman’s office is no longer taking calls. From anybody. That strikes me as meaningful because just a month ago he was putting in more face time than ever as a way to impress potential investors.
-Does anyone know why is Quadrangle featured so prominently among the heavy hitters in PE? The firm only invests between $100 million and $250 million on equity on deals, meaning their largest deal is what, $2.5 billion? The firm is listed among the likes of Blackstone, Carlyle, KKR and TPG, which, during the bubble, struck the largest deals in private equity history. Deals 100 times the size of Quadrangle’s purchase of Maxim (which is the most in-depth deal example the story offers.) Nothing against the firm, it just seemed like a random inclusion.
Earlier: Steve Schwarzman Is Not Freaking Out