Details are still sketchy, but Geithner apparently will propose that the second half of allocated TARP funds be used to buy up so-called “toxic assets” from bank balance sheets. If that sounds familiar, it’s because that’s what the first half of TARP funds was allocated for (before Hank Paulson became a serial freelancer). The difference seems to be that Geithner wants private investors to also chip in, since the price tag will be WAY more than $350 billion. That means private equity, hedge funds and anyone else sitting on a pile of dry powder. The assumption is that such investments would come with major downside protections, as an incentive for investors who, for the most part, have eschewed the opportunity to buy said “toxic assets” on the open market.
The obvious question, therefore, is if private equity firms would want any part of this? I’m sure there are small pockets of interest – Leon Black, Chris Flowers and Wilbur Ross come to mind – but how about Bain, Blackstone, Carlyle, KKR, TPG and other mega-fund managers? It would seem that a goodly portion of them would have to buy in so that Geithner’s plan could work, because even the largest PE funds couldn’t spend more than one or two billion dollars on such an investment.
My gut feeling is that few firms will take Geithner up on his offer, although I’m making lots of calls to find out if my gut has led me astray. First, many private equity firms can’t do this type of transaction, due to restrictions in the limited partnership agreements. Second, firms with enough LPA flexibility still might hesitate, due to:
- The continued difficulty in assessing the underlying asset prices.
- Few PE firms have both financial services and real estate teams, let alone both.
- Among those that do, even fewer have distressed financial services and real estate teams.
- Limited partner complaints that could cause future fundraising troubles.
- Limited partner inabilities to meet big Q1 capital calls.
On the flipside, some cynical firms could use such an opportunity to put lots of money to work, rather than cutting fund sizes (and, by extension, cutting fee income). Plus, there’s always the possibility of some firm honestly believing that they’re getting in on the ground floor of a future high-rise. Finally, wouldn’t one have to assume that Geithner would have already gauged PE interest as part of his design work? If so, perhaps that means that he’s been met with interest…
We’ll have more on this later today after we talk to some folks, and do some actual reporting. Be sure to let me know your thoughts…