Wednesday, February 27, 2013

Industry Thoughts | Private Equity's "Doughnut Hole" Is More Like A Steak Bait

Yesterday afternoon, Fortune's Dan Primack put together a piece on some of his observations during the SuperReturn International Conference in Berlin. It was an understandable tongue-lashing at the industry on how private equity investors and execs truly believe the leveraged prices are too high and yet are not calling for a pull back. Dan's line at the end sums up his piece perfectly:

To be clear, I'm not arguing that we're about to have another rash of TXU's on our hands. But that's due more to capital constraints than it is to changed attitudes or behaviors. What I am saying is that private equity investors are aware of a disconnect between their head and their heart. And they don't plan to do anything about it.

Dan is right in that PE execs are not openly calling for a pullback. This IS SuperReturn after all, where it's one of the major PE conferences designed to feature key speakers. Whether the Q&A session was more strict on getting answers or not is something to be seen, but we will have to rely on Dan's and Cristina Alesci (who Dan saw grabbing an interview right before he did - early BloomBird gets the worm, I guess) for the deep interviews at this point.
(UPDATE: Cristina responded to Dan's tweet in the most perfect way.)

While these execs aren't openly calling for the pullback, they are DEFINITELY saying it in private. In my many talks over the past few weeks with middle market, mega-size, and lower-market PE shops, many execs have told me that they are finally seeing deals pick up (everyone was in a rush to close deals at the end of December because of tax reasons) but the cheap debt is making everyone think twice. 

This is why I compare the doughnut analogy that Dan used to more like a "steak bait." 
(DISCLAIMER: I was hungry when I came up with this analogy.)

Private equity's investors (limited partners) have the upper hand again in this day in age of the private equity industry, and while there is cheap debt and financing out there, the equity dollars are still seriously crushed by the terms, conditions, and extra debt being loaned by the banks. It's like the banks drop out a big juicy Peter Luger porterhouse steak with a very strong hook and fishing line attached to it. You grab it, be prepared for a rough ride. As Dan put it in his post...

As one senior PE investor explained it to me: "You might get excited that someone is willing to put $1 billion of debt next to your single dollar, but remember that your bill is now sitting beneath one billion or them."

There is a heavy sense of trepidation among PE firms I've talked with in terms of deals with all the available financing out there; that is why you'll see much more structured, smart deals that will come out within at least the next 2 quarters. I will say this though: if I'm wrong, I'll go eat a paper steak, Dan.

- PE Feeds

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