Pointsofinterest
Life After Death Critics are singing private equity’s swan song. They’re wrong—and here’s why. By Joe Flood
In 2007, Stephen Schwarzman, the chairman of the private equity giant Blackstone Group, completed
the largest leveraged buyout in history for Equity
Office Properties, threw himself a $3 million 60th
birthday party, took Blackstone public with a $31/
share IPO that closed out the day trading at $35, and
was named the new “King of Wall Street” by Fortune
magazine. That same year, private equity, along with
hedge funds, Asian sovereign capital, and petroleum
exporters, were named the four “new power brokers”
on the international financial scene by McKinsey’s
Global Institute think tank, which predicted that the
Fab Four’s assets (which had tripled in the previous
seven years to $8.4 trillion) would grow to more than
$20 trillion by 2012 if things went well, and to at least
$15 trillion if they went poorly.
Such innocent days. Following that high point,
Blackstone’s stock price quickly tumbled to the mid-low
teens, where it has more or less stayed. Schwarzman’s
birthday party has come to be seen as an exemplar of
the excesses of a dying empire, like Michael Milken’s
1980s “Predators’ Ball” high-yield bond conferences,
or Marie Antoinette’s playing peasant in a mock
village she built at Versailles. Private equity firms
have languished as tightened lending and valuation
cuts brought the market to a near standstill. Even
people like James Kilts, a partner at Centerview
Partners, one of the fastest growing boutique firms
in the business, was saying that you could make an
equally strong case for the private equity world dying
off as you could for it surviving and growing, as it did
after the declines of the late 1980s and early 2000s.
five positive trends that could be the salvation of this
world (and the pessimistic caveats they come with):
by….I don’t think it’s going to happen any time soon,
but I’m sure that, going forward, we will see a return
to the tremendous enthusiasm we’ve seen [for private
equity] in the past.”
Even with credit markets locked up, firms could
have used already-committed capital to do low- or
no-leverage deals during the doldrums of 2008-9;
in 2009, there was an estimated $1 billion in dry
powder waiting to be used. Yet, many chose to listen
to the pleas of their already overcommitted investors
and wait until things improved to call in the cash.
However, recent indications are that the demise
of private equity is, as Samuel Langhorn Clemens
might put it, greatly exaggerated. Here’s a look at
1) It’s All Cyclical: Compared to investment banks
and the stock market, the recovery of the private equity
world has hewed a little closer to the economy at large.
This has its upsides: The fact that Goldman is doing
so well compared with, say, the employment rate, is
no small part of the reason for the beating it’s taking
in the press right now. The downside, of course, is
that private equity is still in the doldrums, but look
for that to change as the economy improves. “Private
equity has always been intensely cyclical,” says Josh
Lerner, the Jacob H. Schiff Professor of Investment
Banking at Harvard Business School. “There are
periods where debt is freely available and there’s a
boom, then periods where debt is very hard to come
2) Dry Powder: There are two sides to the slow
leveraged buyout market—supply (i.e., invested
capital to do deals with) and demand (attractive,
debtworthy companies to take over). On the supply
side, things aren’t quite so dire as they may have
appeared over the last two years, with the lack of
deals often owing to good investor relations on the
part of private equity firms. Unlike hedge funds,
which investors can (generally) pull money from
with minimal wait-times, investors commit cash to
private equity firms over a longer period, with firms
only calling it in when the time arrives for a deal.
4) China and India: For private equity funds,
growth markets generally mean smaller companies
and smaller deals. In both China and India, this is
complicated by often opaque regulations that limit
investment, lending, and ownership. That said, both
China and India have fared reasonably well over
the past two years, and the large number of funds
that built offices there in the run-up to the collapse
are ready to start doing deals. Consultancy Bain
and Company expects 20% of global dry powder
to be directed toward the Asia-Pacific region, with
investment returning to 2007 levels by 2012. That
might be a rosy view, but the lure of emerging-market
growth rates is proving to be one of the most enticing
offers in the private equity world.
