Wednesday, March 18, 2009

No more need for leverage in the Private Equity business?

Is seems that for the past year, a trend has been developing in private equity. Non leveraged buyouts. deals are harder to find. credit is harder to secure. LPs are 'unsure' if they want funds to call capital. So the funds are getting creative to be able to continue to invest. The funds must pay much cheaper pricing and have a story that can convince LPs that the upside is huge. Risk, or course, is higher, since the funds have to deploy much more capital per investment, and the value of the asset must significantly increase to exit with a profit. In the old days, LBOs could make serious returns without creating too much value - since profitable businesses would be paying off the debt, paying less corporate tax and within a short period of time - paying off the debt while the fund owned the company. The funds could do 2-3x without creating any value!

Will LBOs continue to exist, or will only a handful of EBO value generators take over - leaving behind the days of financial engineering?

A few big LBOs have been seen trying to move to the EBO model - like Advent, Hellman & Friedman, and others.

Here, at Goldrock, we are pure equity players - and we strive to assist our companies to grow and create REAL shareholder value. Will see if the rest will follow...

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