Private equity is one of Wall Street's great euphemisms.
So-called private equity firms put up little equity when they make acquisitions. They are all about debt, gobs of it. We should call them by their proper name: leveraged-buyout firms.
LBO firms such as Blackstone Group LP (pictured above), the biggest of the bunch, and KKR & Company have even less business calling themselves private investors since they have become public companies. The recession and its aftermath have shown once again the folly of loading up with debt at the expense of equity.
Big names in LBO portfolios like hotel chain Hilton Worldwide, casino-operator Harrah's Entertainment Incorporated and the Texas power company formerly called TXU Corporation have negotiated better terms from their lenders, or need to do so.
Troubles arise
Not surprisingly, LBO firms, once the darlings of pension funds and college endowment funds, are having trouble raising new funds to do more takeovers.
They took in only $13 billion (Dh47.7 billion) of new money for buyouts in the first quarter, compared with a peak of $68 billion in the first quarter of 2008, according to Pregin Limited, a London research firm.
Leveraged buyouts were conceived to take public companies private at a premium to market value with mostly borrowed money, then milk the targeted companies for management and advisory fees and finally take them public again in about five years — and score a big capital gain.
No Relief
In their current sad state, LBO firms can't increase their fees much by making more acquisitions and the poor results of companies they own has diminished the potential of reselling them at a profit. Blackstone, which also has real estate funds and investments in hedge funds, reported a net gain from investments of $176.7 million in 2009, a decline of 97 per cent from $5.42 billion two years earlier.
Blackstone, founded by former US Commerce Secretary Peter Peterson and Chief Executive Officer Stephen Schwarzman, sold stock to the public in 2007 at $31. Its average share price since then has been about half that amount.
Last week, Blackstone managed to reduce the debt load at its Hilton chain by $3.9 billion, to about $16 billion, and extend its maturity by two years to 2015. Hilton bought back $1.8 billion of debt and converted another $2.1 billion into preferred equity.
Twice since it was bought in 2008 by TPG Incorporated and Apollo Management LP, Harrah's Entertainment has managed to talk lenders into cutting the amount it owes and giving it more time to pay.
These investment outfits no doubt will regain their popularity. But never forget their trade is risky leveraged buyouts. Leverage as in debt, debt, debt.
