Saturday, August 05, 2006

Abelson on private equity

Barron's editor Alan Abelson quoted from my previous post in his August 7th Up & Down Wall Street column.

Here's an excerpt (with Barron's spelling errors corrected):

Money, both institutional and individual, has been coming out of the woodwork in staggering quantities and pouring into private equity. (Admittedly, we're envious, since whenever we tap our woodwork all that comes out are carpenter ants.)

As Peter Cohan of Peter S. Cohan & Associates writes: "Private equity, the business of using debt and a sliver of equity to take companies private, borrowing to extract big fees and multiplying the equity through an IPO or acquisition, is getting long in the tooth." He likens it to the venture-capital boom of the 1990s in "stretching outside its comfort zone to find big deals into which it can pour the new cash." In the process, it's suffering a rash of busted IPOs while its supply of "cheap debt is drying up as credit quality falls and interest rates rise."

Noting the rush of mutual funds into private equity, Peter purposefully recalls that the handwriting was on the wall for the venture-capital boom when in December 1999 a venture-capital firm, Draper Fisher Jurveston, launched meVC, a venture capital mutual fund. All you innocents out there, beware smiling brokers offering the private equity equivalent of meVC (which sounds like something Tarzan might have put a few coins into when he and Jane were a tree-swinging couple eager for financial security preparatory to starting a family).

Peter cites the deals to take private HCA, the hospital chain recently reviewed in Barron's, and Philips Electronics' semiconductor unit as indicating the private equity gang is struggling to find deals big enough to put all that gusher of capital to work. Plainly dubious about the buyout, he relates that it'll leave HCA with debt that'll be a cool six times earnings before interest, taxes, depreciation and amortization.

In like vein, the Philips Electronics' deal strikes him as highly problematic. In light of the "high capital intensity and rapidly changing technology in the semiconductor business," he contends, "it's difficult to see how KKR and Silver Lake Partners," the winning bidders in a bruising bidding war, will be able to generate attractive returns on their $10.2 billion investment.

And, all the while, borrowing costs are mounting sharply.

Maybe private equity should have stayed, well, private.

1 Comments:

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