Update: ABC now reporting that the talks are dead. Good.
If 2007 was the year in which private equity became a dirty word, 2008 has been the year in which it hosed off and began selling soap down on Wall Street. In fact, a good case could be made that the industry has helped salve the credit crunch, by acquiring bad loans (Citi, Deutche) and injecting new capital into troubled financial institutions (WaMu, MBIA). From black hat to white knight in less than 12 months.
But then along came Cerberus with another gallon of mud. ABC News is reporting today that the firm is in discussions to invest up to $200 million in Blackwater, the private military company whose work in Iraq had prompted scores of federal and Congressional inquiries. Not only has it been accused of over-billing, but also of tax fraud, improper use of force and arms trafficking. It’s almost as if Cerberus is uncharacteristically jealous of all the negative attention Carlyle Group gets.
Now I’ll stipulate that this might look like a wonderful financial deal, since U.S. government procurement officers remain blissfully ignorant of Blackwater’s alleged penchant for misdeeds. That still doesn’t make it a good idea. First, it’s always dicey buying into a company with serious legal issues (see: VC investment in Napster). If any of these issues get a full hearing and Cerberus is an owner, you might see Stephen Fienberg get called to testify (actually, I think his full name is “The reclusive Stephen Feinberg”).
The very spectacle would put Cerberus and its industry in a poor light, whether or not liabilities are determined. Even those who value Blackwater’s services have to admit that the whole thing is a bit seamy.
Cerberus may not care about private equity’s overall reputation, but it should. These things have a way of snowballing. For example, more than a few mega-buyout pros believe that carried interest tax treatment became an issue the day Steve Schwarzman had Rod Stewart croon “Happy Birthday” to him.
So here’s to hoping Cerberus nips this in the bud. After all, it’s got plenty of work on its hands with GMAC and Chrysler.