The no more private in Private Equity

Should you have some ties in your typical US public corporation, the type whose stock value has traded sideways and below some high point, you also know how one of the hopes espoused by the staff whose stock-option plan is underwater is that the white knight would come embodied by a hedge/private-equity fund.

That a large number of the hedge-funds or private equity groups are mere conduits into funny deal-making, which may already be the effect of too much regulation meant to outlaw stupidity, will be verified sooner rather than later. Give or take a mishap in the money supply and there we have the proof.

That a great number of your typical CEO in public companies has neither had business-compass nor found one puts some of the folks in private equity in real demand. Indeed, they have connections, are not hindered by much business-correctness, have IQs and cash above the standards, enjoy all the benefits associated with the cachet of exclusivity, and appear to be able to make things happen.

All the above being considered, not all funds are created equal. Those that enjoy the most their positions have come to a point where they offer (parts of) themselves to the publicly traded markets. Some view this as the ultimate sign of the liquidity bubble, for others it is an opportunity to invest--see China goes to BX. I, for one, raised the following question:
BX, FIG, LAZ--hedges against a downturn, or vehicles to chase a dream?

+: track record, talent, access, connections, speed, cash...
-: change in tax regime in the US, increased protectionism/oversight @ national levels, public perceptions, founders cashing out, crowded space, excess...
For some great answers from the LinkedIn community of professionals, click here.

Other similar topics (I) covered at LinkedIn are:
And, for another set of views, have a look here: Behind the Buyouts: First Data It's interesting and necessary to learn the views of the labor unions as well. Since Hilton has a unionized workforce and Blackstone got the approval of the involved unions for its taking HLT private, what does this indicate?

Nota Bene: All the links provided here take you to LinkedIn, a professional network where access is based on a free membership. Should you have a problem with this yet still want to read through, just let me know. fCh

3 comments:

Anonymous said...

Who would lend to a hedge fund?: James Saft
Thu Jul 26, 2007 9:12AM EDT

By James Saft

LONDON (Reuters) - The current brutal conditions in markets from mortgages to corporate loans should be giving banks good reason to think long and hard about their loans to hedge funds.

And if they do, watch out, because it would kick one more support from beneath a broad credit market that is already tottering. It would also deal a fresh blow to stock markets that are only now realizing the extent to which they too are addicted to cheap credit.

The business of lending to hedge funds, made by "prime desks" at banks, has been a glorious one in recent years, racking up massive profits for banks and allowing hedge funds to magnify their returns.

The numbers are staggering. Hedge funds are estimated to have $2 trillion in capital under management, and Fitch Ratings has estimated that they borrow as much as twice that amount, giving them investable assets of as much as $6 trillion.

Fitch thinks that more than $1.8 trillion of that is deployed in credit markets, based on an assumption that credit hedge funds are leveraged by between five and six times their capital base.

With that kind of very aggressive borrowing, it doesn't take too much of a move in the market for alarm bells to begin ringing in the offices of banks' risk managers.

And big moves we have had. The cost of insuring European speculative grade borrowers against default, as measured by the Itraxx Crossover index, has more than doubled since June 15, prompted in part by the impact of losses investors have suffered in subprime mortgage debt.

The loan market, which now gets much of its liquidity from hedge funds, has also been hit. Chrysler Corp. was forced to delay its $12 billion auto loan on Wednesday, and Alliance Boots (AB.UL: Quote, Profile, Research) postponed its $10.4 billion deal, in both instances leaving arranging banks holding debt they had hoped to sell to others.

Secondary market prices for U.S. liquid loans have also moved dramatically, according to Reuters Loan Pricing Corporation, falling two points in five weeks, a small move in many markets but the biggest in a similar period on record for loans.

RAISING MARGIN REQUIREMENTS

Hedge funds typically operate at about half the maximum leverage they have available from banks, giving them a cushion against bumping up against margin requirements.

If a hedge fund's performance deteriorates sufficiently, its banks may require it to sell assets to repay loans.

Thus far, news has only emerged about funds involved in mortgage securities being forced by their lenders to sell.

Australian hedge fund Basis Capital said on Tuesday it has hired Blackstone Group (BX.N: Quote, Profile, Research) to negotiate with its banks, and Australian media have reported that some of its lenders have already seized assets which they then sold at deep discounts. Bear Stearns (BSC.N: Quote, Profile, Research) last week told investors in two funds that their investments now have "very little value."

"Tightening in lending margins to hedge funds in a period of heightened risk aversion for credit is a real possibility," said Roger Merritt, chief credit officer at Derivative Fitch in New York.

"A sudden downward repricing of less liquid assets also may create the same result, leading some hedge funds to sell positions at a loss."

A Fitch Ratings study published in June highlighted the possibility of a forced, synchronized selloff in credit markets. The Fitch reports sketches a possible scenario whereby an event of some sort causes hedge funds to mark down their assets. This in turn prompts prime broker margin calls or investor redemptions. Forced sales result, which given overlapping holdings can radiate out from the original market, such as subprime, in unforeseen ways. The process then repeats.

For the banks that make these loans, and for markets generally, the stakes are very high and the decisions are not easy.

Banks face tremendous commercial pressure to lend to hedge funds. They've made great money at it, in aggregate the risks have been well worth taking, and there have been lots of other shops pitching for business.

But as ever, if things go very bad, the first to call their loans will do far better than those who wait, even if in so doing they worsen the panic they fear in the first place.

Investors in all assets should watch this very carefully.

Anonymous said...

this says it all as why ceo's are ever so eager to go along with pe offers:



Hilton CEO Awaits Big Payout From Blackstone Deal

Published: July 27, 2007

NEW YORK (Reuters) - Stephen Bollenbach, the retiring chief executive of Hilton Hotels Corp. (HLT.N), stands to get about $125 million upon completion of the company's sale by private equity firm Blackstone Group (BX.N).

Details of the handsome payout came as Hilton revealed that it faced a dozen lawsuits by shareholders charging its board with breaching its fiduciary duties in agreeing to the $20 billion takeover by Blackstone.

Hilton said in a filing with the U.S. Securities and Exchange Commission on Friday that it considered the payout packages of Bollenbach and other directors and executives in reaching its decision to approve the merger.

The cash-out value of Bollenbach's vested and unvested stock options are $74.5 million, performance share units $13.3 million, and restricted stock units $2.2 million, according to the filing.

In addition, the Hilton CEO and co-chairman, who plans to retire at the end of the year, also stands to receive $34.7 million under a deferred compensation plan, the filing says.

Under the merger agreement, Bollenbach and others get to cash out when the merger closes rather than when the instruments vest.

In the same filing, Hilton said 12 lawsuits had been filed against the company and its directors in various state and federal courts in California and Delaware.

The lawsuits, which Hilton says contain similar allegations, claim that the terms of the merger agreement are unfair and that the consideration to be received by shareholders is inadequate.

Hilton, the No. 2 U.S. hotel operator, said it planned to defend itself "vigorously" against the lawsuits.

Earlier this month, Blackstone agreed to buy Hilton for $47.50 a share. The price represented a premium of about 26 percent over the stock's previous 25-year high of $37.82, reached on February 22.

Hilton shares were up 64 cents, or 1.5 percent, at $44 in morning New York Stock Exchange trade.

ilanit said...

Los Angeles private equity funds that invest in other private equity funds in order to provide investors with a lower risk product through exposure to a large number of vehicles often of different type and regional focus. Fund of funds accounted for 14% of global commitments made to private equity funds

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