We already know that the Great Recession has put private equity to the test. The fundraising boom of 2006 and 2007 backfired as firms were left holding armories full of “dry powder” – $450 billion left to spend, at last count – but couldn’t for the life of them find a way to cash in their investments. IPOs have been choppy. Auctions are expensive. There is a whole world of banks that are difficult to buy.
Now the news comes, via Bloomberg, that a House bill would make it more expensive for PE, VC and hedge fund managers to sell stakes in their firms to raise money or take on new partners. Funds would have pay ordinary income on the sales, Bloomberg points out, while regular businesses wouldn’t.
This might explain why Quadrangle Group just hired Evercore Partners to find potential buyers for a minority management company stake. Get it done now when taxes are still low and partners are plentiful. And, as Primack pointed out when we discussed the issue this morning, this may also go for PE partners who sell shares in their management firms through IPOs; consider Kohlberg Kravis Roberts & Co., who is still queuing up for a listing and whose partners will inevitably eventually want to sell some of their shares in the public markets.
The consolidation trend in private equity was already long-expected. In February, Financial News polled private equity investors and found that more than four-fifths of them expected a wave of mergers, largely spurred by the difficulty of fundraising in a recession.
Hedge funds, too, have been waiting years for their own wave of consolidation. Goldman Sachs notably predicted hedge fund consolidation in 2009; so far, one of the few good examples has been the Man Group-GLG tie-up this year.
As for who the potential buyers of these rushed stake sales will be, that’s still an open question. We all know the world is short on financial saviors. Will be sovereign wealth funds again? SWFs still have plenty of money but they were burned on investments in several major investment banks, and central banks are already pleading with them to buy the debt of troubled countries. Will they be willing to increase their interests in PE firms?