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Sunday, August 20, 2006

The Private Equity Party

Wherever I go, whichever part of the world, whatever be the context, in business meets, in the last three- four months, the most talked about thing is investment and more particularly private equity. In the US market itself, it is getting reported that the buyout business booms, with a total of $404 billion worth of deals done this year, double the pace seen a year ago ( The year before the number is said to be 180 billion dollars). I can recollect having seen atleast 4/5 cover stories in business magazines (not specialist finance magazines) that I came across in the same period – not counting the numerous article(s) that I have come across on the topic. In its elemetnts, for those not clear about what private equity is all about - a set of firms, the private investment bank or private equity company - that include well known names like the Carlyle Group, Bain Capital, Kohlberg Kravis Roberts (KKR) etc, are setting the business climate in fire. These companies huge coffers, swelling from pension funds and private investors, specialize in acquiring a variety of companies, taking them private, "reengineering" them/stripping them/ extending them and then, usually, cashing out with a new stock offering or a sale to another company. I probably spend more time meeting people compared to the time that I spend to read/write(one of the reason that the volume of posts are coming down), I can confirm that based on mindshare and the type of players involved and deals that are being talked about, certainly private equity is almost in the centrestage of global business economy today. I have also written about private equity centered activities several times – just to point a few : here, here, here, here and some more. Now comes the news that Siemens business services may be grabbed by private equity folks. The key thing to remember here is that practically every business in the world today can get related to privtae equity plays - this can relate to business transacations of myriad natures - buy/sell/merge etc.

However this article points out some interesting points about the private equity cult:
The private-equity firms are piling debt on to the companies that they buy, and then often using the cash that the loans generate to enrich themselves rather than putting it toward improving the companies' financial health. It warns that debt can grow too big for the companies to handle _ not so much for the buyout firms themselves, but for everyone else from workers to suppliers to banks with even the most remote ties to the companies. Pointing out that there has been more than $38 billion in dividend recaps so far this year, up from about $7.7 billion in 2004. While this is guaranteeing the private-equity firms cash in their pockets, the added debt means higher loan payments, which not every company will be able to manage. That's especially true in an environment of slowing economic growth and rising interest rates. Credit rating reports suggests that in a sample set they find the default percentage to be about about 6 percent compared to about 3.7 percent default rate in normal cases. All these definitely merits thought and discussion.

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Sadagopan's Weblog on Emerging Technologies, Trends,Thoughts, Ideas & Cyberworld
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