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They Don’t Mean It

The Wall Street Journal today asks if the private equity deal frenzy is nearing its end, and then quotes private equiteers who answer affirmatively. But it neglects to add a colossal qualifier: They don’t mean it.

In most cases, it’s just lip service. Like when Red Sox players say that they’re still worried about the Yankees catching up. Or a gambler on a hot streak who notes that the odds favor the house. Don’t want to appear too confident. Maybe a few actually believe they believe it, but it’s self-delusion. After all, wouldn’t they have pulled over by now if they actually thought the wheels were about to come off?

Even worse, the article goes far beyond accepting bearish sentiment that the deal frenzy will soon slow. It actually argues that such a slowdown has already occurred. For example, it claims that TPG is “showing signs of caution about the markets” – and uses its abandonment of the Dollar General auction as proof. What a crock. This year alone, TPG has bought – or tried to buy – such companies as: Alltel, Alitalia, Coles Meyer, HealthSouth’s Surgery Division, Iberia, J Sainsbury, Qantas, Transfusion Therapies, TXU, Univision and Victor Co. of Japan. Oh, and TPG is also raising a middle-market fund and just acquired 20% of an Indonesian bank. Yeah, some real bears over there…

Oh, and as a side note: An LBO firm is not expressing market caution when it sells positions in companies it has owned for seven or eight years. It’s just following standard LBO practices. As Carlyle’s David Rubenstein has said, “buy and sell” is what differentiates private equity firms from “buy and hold” conglomerates.

None of this is to suggest that the private equity bubble will grow infinitely, although I’d expect more of an overall deflation than a burst. Instead, it is to argue that private equity firms will not be leading the charge (or perhaps whatever is the opposite of a charge). They just don’t have the courage to be cautious – and most of their investors would disapprove of such a contrarian stand (albeit privately).

No, it will have to be the banks who dim the lights, and that will only occur once they’ve had a few loan defaults that they consider systemic rather than anecdotal. Or perhaps if the Fed surprises everyone with a major interest rate hike. But – until that unspecific date certain – private equity firms will maintain their frenzy.