Tuesday, March 4, 2008

There Will Be a Large Private Equity Failure This Year

A British private equity insider believes that there will be at least one large private equity failure this year. The article is interesting because it goes into the causes of the credit crunch in private equity and most of the blame is placed on the industry itself. Text in bold is my emphasis. From the UK Telegraph:

In a speech taking shots at the whole industry, he said: "There will be large private equity failures this year. Absolutely guaranteed. This is a cyclical downturn for the industry. We are going to have very weak returns for a while.

"Companies will go bust and that is going to be a problem. We have got some savagely leveraged companies out there, and unless something else happens to distract them, the politicians will be back and we can look forward to more regulation and tax damaging this business."

Mr Moulton blamed industry players themselves for throwing out normal standards of due diligence and risk assessment during the recent boom years. "Buy-outs were done on mythical numbers like pro-forma, adjusted, normalised EBITDA, which almost always turned out to be 20pc higher than reality," he said. "We were buying false numbers and doing it willingly but the quality of what we were doing had come down. It's the same thing that was going on in the US sub-prime market."

Giving the opening speech at SuperReturn 2008, the major international conference for the private equity industry, Mr Moulton took aim at public relations executives, industry associations, accountants, mega funds and regulators. However, he saved most of his criticism for the banks.


"They bought all this rubbish themselves, most of which their senior managers didn't understand, and they have been left holding the baby with unsaleable, overpriced, over-enthusiastic debt. They are in trouble themselves. It's the same as the sub-prime salesman. They will sell anything to anyone, and they did. If you pay enough bonuses, people will do anything."

He said the image of private equity was of "rich, capitalist swine" but was dismissive of the report drawn up by Sir David Walker for the industry, which aimed to increase transparency and alter the perception of the industry. "The new pedestrian culture of the private equity world", he called it, saying that it would have no practical effect.

Mr Moulton was just one of a host of speakers who forecast no end to the current credit crisis. "I think we are seeing a meltdown in the credit markets that has some life in terms of the downside left to it," said Scott Sperling, co-president of Thomas H Lee.

He said it could take a long time for lending banks to shift the billions of dollars of debt they have been left with by the credit crunch.

His views were echoed by Hamilton James, chief operating officer of Blackstone, who said he was working on the basis of a US recession, and by Jonathan Nelson, of Providence Equity Partners, who said he believed a recession had started as long ago as December.

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