Pre-Speech Musings

In less than one hour, Tim Geithner is expected to unveil a new bank bailout plan that will rely, in part, on the participation of private investors. The press conference is at 11am ET, and we’ll be live-blogging it.

I spent most of yesterday on the phone with various private equity pros, limited partners and individuals who were involved in the RTC during the 1980s. While we wait for Geithner, here are a few quick thoughts in no particular order:

*** Private equity firms are interested. Most private equity pros I spoke with expressed at least a mild level of interest in the “toxic assets” that Geithner is expected to push into some sort of bad bank structure. I was really expecting far more apprehension. Worth emphasizing, however, that I did not speak with folks at firms that would fall way outside of this bailiwick (e.g., retail-focused small-cap fund).

*** Many limited partners are far more, umm… circumspect. Said one endowment manager: “Murder. I will murder [my GPs] if they do this. It would be easier to face my trustees in handcuffs than with a few hundred million in these toxic assets.”

*** One of the big LP concerns is about big, simultaneous capital calls. Low PE deal volume has been a boon to cash-strapped LPs.

*** On the other hand, it isn’t expected that the first actual transactions could even begin this quarter or next. The Mellon process, for example, took three and a half months. And this is so much more complex…

*** The aforementioned PE firm interest is completely contingent on what types of guarantees Geithner comes up with. As I said yesterday, no one’s been clamoring to buy this stuff on the open market. General consensus is that Geithner won’t come out with too many specifics today, thus kicking the can a bit further down the road. But, in the end, this becomes a risk/reward numbers game.

*** One reason that Geithner is expected to use broad strokes this morning is that he doesn’t seem to have reached out to a large swath of potential buyers. I know of several large PE firms that have at least surface interest – big names, who’d be obvious for this sort of thing – but which have not been consulted by Treasury. Ditto for many of the folks who helped come up with the original bad bank concept in the ‘80s. I repeatedly heard the word “insular” to describe Treasury’s behavior so far. On the other hand, Geithner does have an old Blackstone hand – Matthew Kabaker – working with him…

*** A big question is how PE firms would structure these deals. Would they be pure fund investments? If so, many firms would need amended LPAs. One possibility is that firms would form platform acquisition companies to acquire the assets.

*** This will not be the last time private equity becomes a factor in bank bailout conversations. Just wait until Treasury tries to get a handle on all the securitization – including of leveraged loans – that went on over the past few years…

*** Again, we’ll discuss all this and more over at the live-blog.