A Lot Of Money Wasted On A "Clumsy Trick"

Implications: In a rare moment of candor, Henry Kravis, Alan Bond, Hamilton James and David Rubinstein confess at the Super Returns private equity conference, that the private equity market is simply a "proxy for the credit markets".  They also agree that the private equity buyouts are "now recognized as reality triumphing over hope" and are seen to "count for very little". The retail industry was a major target of private equity buyouts and have come to an abrupt halt with the onset of the credit crisis. The big question is whether the buyouts that did occur will end up working out?

Analysis: As reported in several previous GLG analysis by this writer, Several of these highly leveraged buyouts have started to unravel. The largest of which is Sears (SHLD) but the recent bankruptcy of one of my former clients, Wickes Furniture, is another very appropriate example of how silly and out of hand the buyout bubble had become.

As the FT article indicated and Warren Buffet observed, "when the tide goes out we see who has been swimming without their shorts". In 2006 Citibank published a report showing that "returns could exceed even the best historical private equity returns by simply leveraging basic stock market indices by three to one".

Within weeks of that report, the private equity market was AVERAGING a leverage rate of over five to one!

So let us be candid. the deals of recent years are leveraged buyouts.  Simple financial engineering made possible by easy monetary policy and lax credit conditions. The fact that they generated enormous fees for placing a heavy debt burden on troubled companies is, in my opinion shameful.

Private equity should not be just about debt. The folks who have lost their jobs and/or their investments by this "clumsy trick" of financial engineering will hopefully learn that there is no such thing as a free lunch.