Phorgy Phynance

More on CLOs and private equity

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The discussion over at Nuclear Phynance continues.

This morning, we are talking a bit about high yield spreads, CLOs, LBOs, and private equity. Here is my latest contribution

See? It is much more fun to have opinions on the future rather than the past. We will ultimately be able to see who is right rather than looking in the rear view mirror and say what idiots others have been.

Private equity is awash with cash, no doubt, so what are they going to do with it? My opinion is that it is not the intention of private equity to make current shareholders rich (duh!). They’ll only execute an LBO if they think there is profit to be made. Generally, you might think lower equity values would make a company an attractive LBO candidate, but what if the low equity value is because the company’s actual value is decreasing due to deteriorating economic and market conditions? PE will not be catching falling daggers. That coupled with increased financing costs will give PE limited options for investing the cash they are sitting on. If they don’t invest, pension funds and endowments that have gorged them with cash will begin extracting that cash to invest elsewhere. Why pay PE fees for treasury-like (or worse) returns?

The IPO rip cord worked for the partners at Blackstone, but the subsequent tanking will make other PE’s going public more difficult.

Time will tell

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Written by Eric

July 25, 2007 at 8:27 am

Posted in CLO, Private Equity

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