Private Equity (PE) firms typically rely on high levels of leverage for their deals. It was almost impossible for them to close any deals last year, as financing became increasingly difficult, while banks were forced to sit on a backlog of loans. Besides, the delay of some high-profile PE deals has raised doubts about its ability to maintain high levels of growth this year. Warburg Pincus, New York-based major player, saw the value of its $500 mn investment in battered bond insurer Municipal Bond Insurance Assurance (MBIA). Similar troubles have plagued other PE firms that have gone public.
Last year's floatation of Fortress Group also proved to be a disaster. KKR (formerly known as Kohlberg Kravis Roberts) and the Carlyle Group both regarded as the symbols of the PE aristocracy, got into trouble because of their credit funds. Overall, it has been a torrid time for what was once a red-hot business. PE industry, known for innovation and adapting to the changing economic conditions, is refusing to take the credit crunch lying down. The buyout crowd which has been in retreat for the past one year has started to invest again after sitting for months on the sidelines.
While the balance sheets of cash-strapped banks continue to shrink and their asset prices fall further, PE players are beginning to take advantage of inexpensive deals. Analysts anticipate a significant rise in public-to-private transactions as venture capitalists are on the lookout for undervalued but financially healthy public companies. Particularly, distressed M&As may become a major target, as very often these deals need to be completed fast, and the PE industry has huge amounts of cash at its disposal. |
