PE May Be The New Wall Street, But Wall Street May Be The New Love Canal

As Wall Street teeters on a precipice that sits directly above Main Street, a lot of eyes are turning toward private equity. Numerous PR flacks have emailed in the past day, to offer up clients who can discuss how buyout firms are positioned to become the white knight to [insert your favorite financial institution here]. Larry Kudlow even said on CNBC yesterday that private equity “may be the new Wall Street” — supplanting investment banks as the primary source of funding capital.

I agree with Kudlow, but add an addendum: Private equity may be the new Wall Street, which means that it had better take a reflective breath before becoming today’s Wall Street.

There are certainly compelling reasons for big buyout shops to make a play for something like Lehman Brothers’ investment management business. It could probably be bought on the cheap from a motivated seller, and could help provide instant platform diversification. But there are also enormous unknowns that no amount of due diligence this week can nail down. In the case of Lehman IM, here are three:

What exactly are you buying? Won’t legions of wealth managers leave to hang their own shingles closer to home in Greenwich, and bring their clients along with them (either immediately or after a non-compete period)? Will these folks feel the same loyalty to Bain Capital or Hellman & Friedman?

Lehman Brothers and its affiliates are going to be the subject of untold lawsuits over the next few years. How can you possibly manage that type of cost or risk?

Mega-buyout fundraising is becoming a reticent animal, and it may not be smart to blow billions on a big deal that even its (prospective) apologists would admit is rushed.

I spoke to a lot of LPs yesterday who have money with the four firms listed as possible buyers of Lehman’s IM business: Bain Capital, CD&R, H&F and/or KKR. With two exceptions, the consensus sentiment was mortification.

A lot of these folks also have money with TPG Capital, and are just now steeling for ahuge loss related to Washington Mutual. One noted that these firms are about to have “Come to Jesus’ moments when mark-to-market financials come due in December, and that the focus should be on existing portfolio companies and surer bets. Another referred to the current situation as “too frantic” for responsible investing, and noted how the TPG/WaMu deal also came in the context of a desperation deadline. Then there is peHUB contributor Mr. X, who summed it up this way: “As a Bain investor I hate it.”

Private equity may well be the new Wall Street. But Wall Street may be the new Love Canal.