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Trouble With Private Equity

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Nouriel Roubini's Global Economic Monitor has a post up about the Bust of the Private Equity and LBO Bubble. Registration is required. But it's worth it. Apparently, already seven private equity takeovers have gone bust, include of one retailer--Wickes Furniture.

The picture is definitely different from when we wrote this story.

Here's an excerpt from Roubini:

But what a difference a year makes! Yesterday's Masters of the Universe are now in the dust as the private equity and LBO bubble has now gone bust. By now dozens of LBOs announced in 2007 have been either restructured, postponed or cancelled altogether; also seven actual medium sized LBOs have gone into bankruptcy this year alone and many more of the bigger ones may also go bust.

Let us next flesh out in more detail this bust of the private equity and LBO bubble…

The current private equity bust is no surprise as the previous LBO boom was all driven by the easiest credit and liquidity conditions ever. Until last year there was a slosh of liquidity and credit with spreads on junk bonds so low (260bps last June) and rates on leveraged loans financing LBOs also so low that any private equity firm could take private any marginally profitable firm, load it with cheap debt and levered it to the max and still make a very good return on the investment. Even so, as recent academic studies have suggested, a lot of the return that private equity firms generated was “schmalpha” rather than “alpha”, i.e. driven by the high commissions and fees and guaranteed payments that owners of such private equity firms were obtaining from such deals rather than true value generation.

Full story is here.

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Elaine Misonzhnik

Senior associate editor Elaine Misonzhnik has been writing for National Real Estate Investor since June 2006 and has covered commercial real estate for more than 12 years. She first became...
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