The Flip Side: 2009 Brought a Few Surprises

Yesterday we posted a list of the year’s five “false alarms,” or trends that were blown out of proportion in the last year. Things that everyone got excited about happening (for better or for worse) but never really happened. You know, things like LP defaults, the secondary market, and PE bank deals.

That’s not to say we weren’t surprised by a few things, for better or for worse. Here’s a slightly shorter list of what caught private equity off guard this year.


[slide title=”Salary Freezes”]

Private equity has been dead, dead, dead since the middle of 2007, and yet compensation hasn’t reflected it at all up until this point. Last year PE salaries actually increased: a Glocap and Thomson Reuters’ 2009 Private Equity Compensation Report shows that total cash compensation rose for PE partners around 1% for growth/equity firms, 3% for mega-buyout firms. An informal Semaphore survey showed that 51% of PE pros expected their income to increase in 2009. Not going to be the case in 2010.

According to a study from Preqin, 38% of PE firms have already implemented a salary freeze and a 22% more are considering one. Beyond that, the round of PE layoffs that affected 86% of buyout houses last winter are not over: 40% of firms plan to further reduce staff in the coming year, according to a survey from BDO Seidman. Lastly, carried interest tax is about to become a reality, so PE’s giant room of coins is about to get a little shallower.

[slide title=”Pay-to-Play”]

Even though the investigation started back in 2007, it wasn’t until this year that Andrew Cuomo began aggressively pursuing shady fundraising dealings of New York State Common Retirement Fund, and we learned exactly how deep the tentacles of this scandal went. So far it’s gotten guilty pleas from Saul Meyer, Hank Morris, Julio Ramirez and Elliot Broidy, garnered “repayments” from Access Capital Partners, Falconhead Capital, HM Capital Partners and Levine Leichtman Capital Partners and larger “agreement” sums from Carlyle Group and Riverstone (Quadrangle pending). Beyond that, we’ve gotten a ban on placement agents, an end to New York’s single fiduciary system, a separate resignation from the Chief Investment Officer at New Mexico, and an introduction to the movie Chooch. And this thing is just getting started.

[slide title=”IPOs”]

No one expected the public markets to come roaring back the way they did this year. Naturally, exit-starved buyout firms were ready to strike while the iron’s hot.  Even by June, nearly half of the 32 companies that filed to take themselves public were PE-backed. Following the success of offerings like Dollar General and Avago, the mega-firms began gussying up their most IPO-ready companies, leading the Ecomonist to suggest that the exit market, which in the first half of this year has raised only $21 billion, compared with $115 billion in the first half of 2008 (according to Dealogic), is past its worst.


Previously: 2009, a Year of False Alarms for Private Equity