Saving Pirate Equity

[ParticleMan]

From two absolutely brilliant posts today...

Yes, so cunning that this is exactly what another PE firm did with a bank last year in the US. The matter was really well publicised because it stopped the bank from getting more capital it needed. I believe the delays in getting more capital (the PE firm ended up removng the clause) caused the bank to go bust.

Real smart those PE guys.

You'll find they've been real smart on a whole different scale in the UK and worldwide, it is soon going to make the news on a daily basis, to the point where you will never be able to forget how smart they were.

You're gonna love PE soon I assure you.

The US bank was Washington Mutual if memory serves.

I agree that we will be hearing more and more about private equity over the next few years.

As yet, none of the really big PE deals have fallen over, but it is only a question of time. I remember a statistic that reckoned about 30% of the UK workforce are employed by PE owned companies.

By 2006/2007 the secondary buyout market had started to resemble the BTL market - purely speculators buying assets of each other using debt in a rising market (and thinking they were clever for doing so). Just like BTL, the flow of debt has now dried up, and so have the big buyouts. The cov-lite 8x ebitda loans that characterised the height of the PE boom are the big brothers of the 125% liar loans that typified HPI.

The fallout is not going to be pretty.

I think for smaller cap, growth companies (say sub £100m EV) the private equity model makes more sense than the plc route, but much above that, and I think the capital growth of the last few years has been illusory, and returns to pe investors have been simply as a result of their skill in handling transactions.

... and one far less intelligent comentator...

This deserves its own thread.

(I agree that the capital growth has been plucked from thin air, and you've just arrived at a plausable-enough description of the exact mechanism; whatever it was, it wasn't a demand spike that lead to the insane asset prices we've seen since the 90's and possibly earlier)

This also goes a long way toward describing why producers aren't failing - because purely and simply the producer is not carrying the worst of the leverage (the PE funds are).

Hoooooly Brown-stuff.

So, gentlemen. Lets sharpen our stakes, knot our nooses, and go sark hunting.

Lists please - reverse order, most recent trumps most (EBITDA'ly) leveraged deals.

Who did 'em, who's now holding the baby (we'll start by assuming that shareholders are toast, so this isn't terribly interesting - I wanna know which PE funds are holding how much debt secured on these "assets").

[Blue Peter]

From two absolutely brilliant posts today...

... and one far less intelligent comentator...

So, gentlemen. Lets sharpen our stakes, knot our nooses, and go sark hunting.

Lists please - reverse order, most recent trumps most (EBITDA'ly) leveraged deals.

Who did 'em, who's now holding the baby (we'll start by assuming that shareholders are toast, so this isn't terribly interesting - I wanna know which PE funds are holding how much debt secured on these "assets").

Do you think that this is the sort of data that the FSA has been ignoring? or isn't it even collected?

Peter.

[ParticleMan]

Do you think that this is the sort of data that the FSA has been ignoring? or isn't it even collected?

The latter. These (PE funds) are marketted to folk who are assumed to know what the heck they're doing.

The FSA's interest is going to begin and end with making sure that the capital raising follows the rulebook - beyond that you'll be pretty much on your own.

This is going to be a humdinger of a party (as good as the junk bond crash in the 80's for essentially the same reasons) - good old fashioned high-risk borrowing, leveraged up the wazoo, going horribly horribly wrong as the assets that've been leveraged downshift in the face of collapsing demand.

And there'll be no government bailouts of lenders going on here.

Grab your keys and start your engines, I think we've worked out who the patsy is in this market...

[CharlieChuck]

From Sunday's times' John Waples agenda column re: 3i.

http://business.timesonline.co.uk/tol/busi...icle5536319.ece (about half way down)

Three-eyed monster

IT’s hard for a fund manager to find reasons to buy shares in quoted private-equity groups such as 3i and Candover. They are complex businesses. There is debt in the parent companies — and then there is the debt hidden in the myriad individual buyout deals, where there is little transparency about earnings and borrowings.

In such times of uncertainty, investors have every reason not to bother looking at the numbers. That helps to explain why the shares, which in better times trade at a small premium, are languishing at discounts to net assets of 60%.

However, it is worth taking a closer look, and 3i provides an interesting case study. It has gross debts of £2.8 billion, before cash (and undrawn facilities) of £954m. It has a market value of £1.07 billion and its shares, which closed the week at 291Çp, are trading at a huge discount to last September’s net asset value of a shade over £10.

The economy has deteriorated since last September, but not even the most bearish analyst is forecasting the net assets to fall below 745p per share.

So why is the price still factoring in armageddon? It is because 3i is exposed to the twin forces that have brought global economies to a grinding halt.

Because its business model relies on banks to provide capital, it is seen as a financial stock. And second, because it has interests in dozens of mid-market private-equity buyouts its investments are suffering from the economic downturn.

Chief executive Philip Yea and his board are very frustrated at the disparity between what the assets are valued at and what the City thinks they are worth.

There is no quick fix, though. The group is going to have to deliver the numbers, provide visibility on its investments, value assets on conservative debt ratios and be prepared to sit it out. No matter that out of gross assets of £6 billion only some £2 billion is in mid-market buyouts. The remainder is in growth capital and infrastructure investments. This is yet another company that got suckered by investors into handing back capital and buying back shares at the peak of the market — a strategy that does not look so clever now.

No details of the actual buyouts, but some good info inside on how they are suffering.

[Postigol]

Lists please - reverse order, most recent trumps most (EBITDA'ly) leveraged deals.

Who did 'em, who's now holding the baby (we'll start by assuming that shareholders are toast, so this isn't terribly interesting - I wanna know which PE funds are holding how much debt secured on these "assets").

You're looking at this the wrong way PM. First off, I don't have numbers, but I suspect the amount of dodgy debt relating to mega private equity deals is a far smaller ball game than the mortgage stuff (there are less companies to lend against than houses), and unlikely to put anyone in bail out territory.

Secondly, the debt will be owed by the portfolio companies to their lenders. The PE firms will likely have some investment in the companies in the form of debt, but theirs is primarily an equity risk: If the company can't pay its debts, they lose their shirts.

If things go tits up, the individual companies will go bust; there will be no bail out of the private equity funds. Yes, investors in the PE funds are likely to lose out, but they are grown ups and will have very little comeback. Most of the big investors in PE, even in UK and Europe, are American pension funds anyway(calpers for example), so not a UK issue. Private equity would be unlikely to be more than 30% of their whole portfolio anyway. Yes, the banks will lose out on the loans they provided - but all of the big stuff was a) syndicated and has been traded around secondary markets. Anyone who gets burned on that really only has themselves to blame.

The main point is that the pain will be felt by the employees of these companies when they go under (and no doubt their creditors as well). It would be interesting to see govt's reaction to a huge, iconic UK business, that employed lots of people (say Boots for example), that went bust primarily due to PE overleveraging. You can't take the non response to woolies as an example, as that business was dead years ago.

The TUC was getting stuck into private equity a year or so ago, about exactly these sorts of issues but the message got lost in the typical class warfare chip on shoulder stuff (remember the "paying less tax than a cleaner" nonsense?) and the trail has now gone cold. The BVCA commissioned Sir john Walker to prepare a report into private equity, that basically didn't say an awful lot. It did come up with recommendations on disclosure for PE portfolio companies that were over a certain size, but I don't know if these have been implemented or not. I remember going to the debate when the report was announced, and it was basically lots of smug PE guys laying into brendan barber of the TUC, in front of a totally pro PE audience. Not a fair fight.

And now for the real sting in the tail: most of these PE funds are still sitting on huge amounts of investors cash, much of which is tied in long term - no redemptions. The endgame of all this, and the message that one increasingly hears from them, is that they are just waiting to pick up distressed assets at bargain prices, shaft the creditors and wait for the whole merry-go-round to start again.

[interestrateripoff]

http://www.independent.co.uk/news/business...ebt-500793.html

From 2005

Debt has become the "cocaine" of the private equity market, with leverage levels increasing by nearly a fifth in the past year and bank borrowings hitting record levels.

This has led to industry experts predicting an "accident", such as a big deal going bust.

According to data from Standard & Poor's, the credit-rating agency, borrowings for buy-outs totalled €56bn (£38bn) in the first half of this year, compared with €65bn for the whole of 2004 - making it likely that 2005 will break all records for leveraged buyout debt.

S&P figures show that the average loan was worth 5.5 times the earnings before interest, tax, depreciation and amortisation (Ebitda) of the business being bought, compared with 4.6 times Ebitda in 2004.

Senior financiers said these levels did not surprise them. One explained that he had seen deals financed with loans totalling nine times Ebitda, with recent high-profile transactions, such as ABN Amro's £875m purchase of the Priory chain of clinics, carrying debt of seven times Ebitda.

Tom Lamb, managing director of Barclays Private Equity, said "seven was the new five" for financing. "Everyone is looking at everyone else saying this cannot go on. But it will take an event, like a collapse or a deal going wrong, to stop it."

Another senior financier, who did not want to be named, said: "Debt is the cocaine of the private equity industry. Everyone says it is not a problem for them, but if everyone is using it in large quantities then it will be a massive issue."

Much of the growth has been caused by the massive supply of finance in the market. This year it is expected that private equity firms will raise €30bn from investors, with BC Partners being the latest to raise a multi-billion-euro fund.

Banks have been falling over themselves to lend to the sector, while hedge funds have been on hand to snap up the more complex financing instruments.

Many private equity players in the market say they have walked away from deals because of the high prices being paid.

"We have seen some deals that appear over-leveraged and we do get outbid as a result," said Tim Lebus, a director of Duke Street Capital. "It feels likely that at some stage there will be an accident."

Until recently, the high levels of borrowing were largely confined to the top end of the market - deals of £1bn or more. However, the strong competition among financiers has moved large-scale leveraging into the mid-sized deals of between £200m and £1bn.

"Private equity players have a lot of money to spend, and they have to spend it," said Will Rosen, a partner at lawyers Weil, Gotchal & Manges.

[interestrateripoff]

Overly Leveraged Private Equity Deals Add to Unemployment and Deepen Recession

http://business.timesonline.co.uk/tol/busi...ticle627818.ece

The warning came as the City regulator blew a hole in the culture of secrecy of private equity by demanding that UK banks disclose their financial exposure to highly leveraged buyouts (LBOs).

Hector Sants, the managing director of wholesale markets at the FSA, said that such a default was inevitable but pointed out that small shocks were healthy for the private equity market, which has been accused of piling up too much debt on company balance sheets.

Mr Sants was launching the results of an eight-month inquiry into the private equity industry. The review demanded that the banks disclose the default rates on leveraged buyout deals on a six-monthly basis, as well as the total level of lending on LBOs.

The FSA said that the disclosure would give the regulator a better understanding of the credit cycle. The FSA found that lending on leveraged buyouts among the biggest banks had increased to £68 billion for the year to the end of June, a rise of 17 per cent on the previous year.

The review also highlighted the increased scope for insider-dealing in private equity deals, as well as pointing out the potential conflicts of interest at private equity firms that also run hedge funds investing in debt. The FSA is also demanding that firms give the regulator details of how much capital investors have put into private equity funds. The review comes as the credit agencies, such as Standard & Poor’s, give warning over the increasing debt levels being used by private equity firms intent on buying the biggest companies. S&P said last month that the global default rate had fallen to its lowest level in almost 25 years, but forecast that it would rise between now and the end of next year.

Mr Sants highlighted the potential problems that a large collapse could create for creditors. “If we were to have a failure of a leveraged private-equity backed company it would be quite difficult to put a small number of owners of that risk around a table.” He said it would be up to the market participants to sort out any default. “The flipside of increased risk dispersion is increased difficulty in managing a failure.”

The industry welcomed the FSA paper, which requires responses within four months. Peter Linthwaithe, chief executive of the British Venture Capital Association, said: “The FSA has rightly understood that the more complex financing structures are mainly concentrated in relatively few, larger deals.”

John Cole, of Ernst & Young, said: “I am glad that the FSA has responded with a sensible and even-handed approach. As our report on exits across Western Europe revealed last week, private equity companies are consistently outperforming public companies in terms of creating value.”

[interestrateripoff]

http://in.reuters.com/article/marketsNewsU...K65045020090120

LONDON, Jan 20 (Reuters) - Close to a third of the private equity industry's mid-market portfolio companies could fail as the economic downturn across Europe turns into recession, the head of a leading mid-market private equity firm said on Tuesday.

"It really would not be surprising in this recession if 30 percent of portfolio companies in the mid-market buy-out firms actually failed," Alchemy Partners managing partner Jon Moulton told the LSE Alternative Investments Conference in London.

Moulton drew a parallel to the last recession in the early 1990s when he said receivership was the most common and most valuable form of exit from private equity deals.

He added that while mid-market firms will see a lot of failures, "they will still come out better than mega funds because they had less debt going in".

Cheap-and-easy bank debt fuelled the growth of mega buy-out deals at increasingly high multiples through the middle of this decade, culminating in KKR's European record deal to take Alliance Boots private in 2007 for 11.1 billion pounds ($15.59 billion).

Now the deals done in 2006 and 2007 are widely seen running into difficulties as worsening outlooks and falling asset prices put firms into breach of their covenants.

While Moulton acknowledged that leverage is useful for boosting returns, he said its political impact is beginning to "bite home" as staff in companies pushed over the edge by their debt burden lose their jobs.

"I think those that have overgeared themselves are going to get into difficulty and (are) not going to be able to make it," said David Fitzgerald, managing director at U.S.-based private equity firm The Carlyle Group. Continued...

It would seem Boots are a prime candidate to fail.

Man U must also be getting neverous with the £750m of debt landed on them by the Glaziers.

Haven't found any other info on large buyouts yet.

Didn't the AA or RAC get bought out?

[interestrateripoff]

http://money.cnn.com/2007/02/16/magazines/...rtune/index.htm

The biggest private equity deals of all time. From 2007

1. $38.9 billion - Equity Office Properties Trust

Acquirer: Blackstone

Year: 2007

Comments: A fierce bidding war drove up the price by $3 billion.

2. $32.7 billion - Hospital Corp. of America

Acquirers: Bain, KKR, Merrill Lynch

Year: 2006

Comments: The buyers, including the Frist family, paid only $5.5 billion in equity. The rest was debt.

3. $31.1 billion - RJR Nabisco

Acquirer: KKR

Year: 1989

Comments: It's the Sgt. Pepper's of PE: oft imitated but never topped_ when adjusted for inflation.

4. $27.4 billion - Harrah's Entertainment*

Acquirers: Apollo, Texas Pacific

Year: 2006

Comments: The club's $90-per-share offer was a huge 35% premium over the casino's closing stock price.

5. $25.7 billion - Clear Channel Communications*

Acquirers: Bain, Thomas H. Lee

Year: 2006

Comments: The Mays family's stake is valued at over $1 billion.

6. $21.6 billion - Kinder Morgan*

Acquirers: Carlyle, Riverstone, Goldman Sachs

Year: 2006

Comments: Goldman did the deal and earned fees from the buyers and seller.

7. $17.6 billion - Freescale Semiconductor

Acquirers: Blackstone, Carlyle, Permira, Texas Pacific

Year: 2006

Comments: U.K.-based Permira established a beachhead in U.S. megadeals.

8. $17.4 billion - Albertson's

Acquirer: Cerberus

Year 2006

Comments: Joining with CVS and SuperValu, Cerberus spurred management to go private.

9. $15.0 billion - Hertz

Acquirers: Carlyle, Clayton Dubilier & Rice, Merrill Lynch

Year: 2005

Comments: Bought from Ford, then sold to the public a year later.

10. $13.9 billion - TDC

Acquirers: Apax, Blackstone, KKR, Permira, Providence

Year: 2005

Comments: The buyout of the Danish telecom is Europe's biggest private-equity deal so far.

* Deal announced, not closed. Top of page

[Bloo Loo]

debt = death in recession.

[ParticleMan]

You're looking at this the wrong way PM.

Thanks for the detailed response, most illuminating.

Few more questions if/ when you've got the time...

Secondly, the debt will be owed by the portfolio companies to their lenders. The PE firms will likely have some investment in the companies in the form of debt, but theirs is primarily an equity risk: If the company can't pay its debts, they lose their shirts.

Ok, fair enough, but for instance if you cast your mind back, pretty much the exact same set of stressors were brought to bear when the ABX turned ugly; banks were forced pretty much at gunpoint to swallow their SIV's right back up again and the odd one or two found the process unBearable.

So as this relates to the PE world - the debt's attached to the co/- and quite possibly syndicated; however the PE funds will rapidly discover that they can either choose to make good on any capital loss where AAA-rateds have been created and onpassed - OR - they will find themselves unable to tap the market for further cash and come to a shuddering halt.

This is exactly the scenario we've just seen play out in the interbank world and I don't think the PE world is immune... appreciate your thoughts on this though.

If things go tits up, the individual companies will go bust; there will be no bail out of the private equity funds. Yes, investors in the PE funds are likely to lose out, but they are grown ups and will have very little comeback. Most of the big investors in PE, even in UK and Europe, are American pension funds anyway(calpers for example), so not a UK issue. Private equity would be unlikely to be more than 30% of their whole portfolio anyway. Yes, the banks will lose out on the loans they provided - but all of the big stuff was a) syndicated and has been traded around secondary markets. Anyone who gets burned on that really only has themselves to blame.

Quite.

I see (dead people?) three groups of victims :-

1/ Institutions still long the leveraged co's equity (and up the supply chain) without adequate CDS protection

2/ Institutions still long the leveraged co's debt (and again up the supply chain) without adequate CDS protection

3/ Institutions who have cash at risk in PE funds

... and they're all toast, but, only the first two are under the spotlight at present.

(edit: there's actually a fourth - sellers of CDS protection - and they're obviously completely at risk if there's nobody left in the first two categories)

The main point is that the pain will be felt by the employees of these companies when they go under (and no doubt their creditors as well). It would be interesting to see govt's reaction to a huge, iconic UK business, that employed lots of people (say Boots for example), that went bust primarily due to PE overleveraging. You can't take the non response to woolies as an example, as that business was dead years ago.

Totally.

However (and it's admittedly a grim attitude to take) but this is also the dull and uninteresting bit - cashflows that can't happen have been robbed from the future into the present and now these guys are dead men walking.

And now for the real sting in the tail: most of these PE funds are still sitting on huge amounts of investors cash, much of which is tied in long term - no redemptions. The endgame of all this, and the message that one increasingly hears from them, is that they are just waiting to pick up distressed assets at bargain prices, shaft the creditors and wait for the whole merry-go-round to start again.

Now that is amusing indeed.

But as I said this will just increase calls from those who find themselves holding any issues were AAA-rated to either claw this cash back, or, freeze the PE guys out of the money markets completely - choose your poison...

Edited January 22, 2009 by ParticleMan

[auk]

Funny how many of that list have turned out to be complete dogs. Freescale in particular.

[ParticleMan]

The biggest private equity deals of all time. From 2007

Stellar stuff there, big ta.

If there were any gongs going for this I'd give you one.

[interestrateripoff]

Stellar stuff there, big ta.

If there were any gongs going for this I'd give you one.

Thanks

I've been worried about this for a long time, I'm sure that towards the end some buyouts where being leveraged at 9.5 times earnings and I'm sure I can remember one in the press at 10.5 times.

I just can't seem to find anything via google.

A lot of pensions are going to take one huge hit when this little pyramid scam goes tits up.

Bailing out the banks is going to be the least of our problems, if PE crashes and burns. I just can't see how many of these buyouts will manage to refinance themselves, huge leverage and collapsing income.

This is like BTL but with companies and on a global scale, all based on future earnings projected on the cash machine that was MEW growth. I mean really what could possible go wrong?

[SHERWICK]

This is like BTL but with companies and on a global scale, all based on future earnings projected on the cash machine that was MEW growth. I mean really what could possible go wrong?

[ParticleMan]

A lot of pensions are going to take one huge hit when this little pyramid scam goes tits up.

Sure, that's the fascination of this particular roadkill.

And from the sounds of it we've more than likely got funds which are :-

1/ Long a PE-enhanced company's common stock

2/ Long a PE-enhanced company's subordinated debt

3/ Long PE funds

... and it wouldn't be beyond the realms of probability (given the degree of tail-eating circularity that's been going on here since the cycle started) that we have at least one fund that is all three at the same time, and in the same named entity (in the same company).

Hoo boy. This is going to be like playing pass the parcel all over again, sure in the knowledge that what's inside is a Flaming Edgar.

[interestrateripoff]

Just added up the 10 biggest from the list and the total is a mere $241.3bn

I'm sure if you kept looking the amount borrowed by PE will be a staggeringly huge amount.

Anyone know the figure for total debt owed by PE buyouts?

[Postigol]

sorry, don't quite now how to work the quote thingy, but in response to the questions i think you've asked:

"So as this relates to the PE world - the debt's attached to the co/- and quite possibly syndicated; however the PE funds will rapidly discover that they can either choose to make good on any capital loss where AAA-rateds have been created and onpassed - OR - they will find themselves unable to tap the market for further cash and come to a shuddering halt."

1) are you confusing syndicated (i.e. PE firm borrows 10bn from a syndicate of banks) with securitised (debt repackaged, rated and sold on)? Remember private equity backed companies are private companies - we are not talking rated corporate bonds here. Banks might sell on their debt (OTC) but there aren't formal ratings, and the PE fund will have no obligations to debt holders outside of the original terms of the loan.

2) you are right in that private equity funds may well struggle to raise new funds from investors in the future, once it becomes clear they are sitting on huge losses. On this basis a cynic might argue that the chaos of 2006/7 was a race to the ultimate end. They knew it couldn't go on for ever - enjoy the party while it lasts

3) they can't raise debt to fund new buyouts. This is already happening, but the banks aren't discriminating against them - they aren't lending big multiples to corporates for acquisitions either. when it all blows over who knows - bankers might resent them for all the bad business they wrote, but they weren't complaining in the good years.

"I see (dead people?) three groups of victims :-

1/ Institutions still long the leveraged co's equity (and up the supply chain) without adequate CDS protection

2/ Institutions still long the leveraged co's debt (and again up the supply chain) without adequate CDS protection

3/ Institutions who have cash at risk in PE funds

... and they're all toast, but, only the first two are under the spotlight at present."

1) not sure i follow: again, these are private companies - it is the PE firm (And management) who owns the equity and shoulders the risk

2) covered above

3) yep

[ParticleMan]

I'm sure if you kept looking the amount borrowed by PE will be a staggeringly huge amount.

Right. But before Noel pops up and whacks you one, you need to net this off (ie verses disposals and/or hedges) if you're looking to impute where the black hole actually is (ie, who's going to wind up in it) at the moment.

Not that the gross notional isn't in itself dryly amusing - it's the whole debt is real/ prices are opinion thing all over again when everyone tries to cram through that narrow little doorway at the same time...

[ParticleMan]

1) are you confusing syndicated (i.e. PE firm borrows 10bn from a syndicate of banks) with securitised (debt repackaged, rated and sold on)? Remember private equity backed companies are private companies - we are not talking rated corporate bonds here. Banks might sell on their debt (OTC) but there aren't formal ratings, and the PE fund will have no obligations to debt holders outside of the original terms of the loan.

I was, and that's cleared that up.

So if there's any implied funding obligation here it's the PE's lending syndicate (and not the fund itself) that's holding it - interesting, and just when the banks had finished nailing the lid shut on the coffins of their own abominations...

2) you are right in that private equity funds may well struggle to raise new funds from investors in the future, once it becomes clear they are sitting on huge losses. On this basis a cynic might argue that the chaos of 2006/7 was a race to the ultimate end. They knew it couldn't go on for ever - enjoy the party while it lasts

3) they can't raise debt to fund new buyouts. This is already happening, but the banks aren't discriminating against them - they aren't lending big multiples to corporates for acquisitions either. when it all blows over who knows - bankers might resent them for all the bad business they wrote, but they weren't complaining in the good years.

Again appreciate this, affirms my suspicions - party party party and then *whoops* who spiked the punch? no more party...

1) not sure i follow: again, these are private companies - it is the PE firm (And management) who owns the equity and shoulders the risk

Aah righty - one of the links prior noted that the market's opinion of 3i equity was at some hideous discount to their opinion of NAV; so this part of the pain is going to get shouldered indirectly, by owners of PE equity.

So the question-de-jour is - what's the funding structure like of the average PE fund? Because their owners are going to get singed as this unravels. Possibly doubly so if some owners are effectively obliged to recapitalise the whole fund - ie, if the PE fund itself is effectively structured in tranches with junior v senior creditors and preferred v common stockholders (and this would not surprise me at all - it's been a remarkably "clever" decade in finance it seems).

Edited January 22, 2009 by ParticleMan

[Discopants]

I read an interesting article in the buisness section of the torygraph yesterday which links into this thread. I couldn't find it online but this online Times article is almost a word for word copy of the Telegraph one.

link

Edited January 22, 2009 by Discopants

[Postigol]

I was, and that's cleared that up.

So if there's any implied funding obligation here it's the PE's lending syndicate (and not the fund itself) that's holding it - interesting, and just when the banks had finished nailing the lid shut on the coffins of their own abominations...

Again appreciate this, affirms my suspicions - party party party and then *whoops* who spiked the punch? no more party...

Aah righty - one of the links prior noted that the market's opinion of 3i equity was at some hideous discount to their opinion of NAV; so this part of the pain is going to get shouldered indirectly, by owners of PE equity.

So the question-de-jour is - what's the funding structure like of the average PE fund? Because their owners are going to get singed as this unravels. Possibly doubly so if some owners are effectively obliged to recapitalise the whole fund - ie, if the PE fund itself is effectively structured in tranches with junior v senior creditors and preferred v common stockholders (and this would not surprise me at all - it's been a remarkably "clever" decade in finance it seems).

There are no implied funding obligations - just losses for whoever holds owns the loan. The PE fund might decide to inject more equity into their companies, to prevent covenant breaches, recapitalise them or whatever, but that is up to them.

3i are a publicly listed investment company - i.e. you can buy and sell 3i shares. This liquid market means that their share price is getting whacked, because everyone one knows that their investments are worth much less than a year ago. The typical PE fund is not listed - it is a private LLP and has no share price. Anyone who invests in a PE fund invests equity, and this is all at risk. If the fund invests all it's cash and make a profit, you get your share; if it losses it all you lose your stake.

[_w_]

One number is sufficient to get a feel for it:

40%

In 2008 40% of UK workforce worked in private equity owned companies.

or to put it another way, 40% of UK workforce workd for monstruously overleveraged companies at the outset of this downturn. Says it all IMO.

Here's a link to an Apax document claiming 15%, or 2.7 million jobs in 2000, and we know how feaverishly that industry has grown in the past few years.

http://www.apax.com/APAX_DOUBLE_HELIX.pdf

I heard the 40% so can't give a reference, but I'm sure someone with the proper Google skills would find it.

[ParticleMan]

Oh boy.

I think I've hit the mother load.

http://extras.timesonline.co.uk/toptrack2008.pdf

[CharlieChuck]

3i are a publicly listed investment company - i.e. you can buy and sell 3i shares. This liquid market means that their share price is getting whacked, because everyone one knows that their investments are worth much less than a year ago. The typical PE fund is not listed - it is a private LLP and has no share price. Anyone who invests in a PE fund invests equity, and this is all at risk. If the fund invests all it's cash and make a profit, you get your share; if it losses it all you lose your stake.

Presumably they structure themselves as an LLP to avoid having to file any public accounts, plus the tax treatment of capital gains.