Monday, January 22, 2007

Private Equity and Pyramids

The Economist:

"THE art of private equity, it might be said, is finding and polishing diamonds in the rough. No wonder, then, that more firms are venturing off the beaten path in search of uncut gems. With record sums pouring into the asset class in recent years—the biggest funds have topped $15 billion—more investors and fund managers are turning to the developing world. Just this week Citigroup unveiled plans for a new $200m fund dedicated to Africa."
"Even veteran investors warn of the hassles of working in such markets. These can include decrepit infrastructure, poor corporate governance and a limited pool of skilled managers. Governments can turn hostile and currencies can turn against you. The cost of borrowing may also be dearer in emerging markets, making it too expensive for acquiring firms to load up on as much debt as they do elsewhere. It takes longer to turn a company around in emerging markets, veterans say, and at the same time exiting from a deal may be trickier."
Private equity investing has been called the great ponzi scheme of the 2000s.
Something like a pyramid scheme, the ones at the top are the founders of the schemes. Those at the bottom (the rest of us) seem destined to be left holding the bag when things unwind.

Private equity groups appear to have picked clean the lowest branches of fruit, and are now stretching for smaller berries.

I’ve notice as of late that these groups are starting to shy away from mortgage debt instruments. That tells me that they believe that the credit market is all played out and private equity is betting it will soon go south.

This is a bad sign. I say this because being private, they know what’s going on with their investments, the rest of us can only guess.

In an article in The Australian Herald Sun newspaper recently, the National Bank of Australia was quoted as saying ‘The wave of private equity takeovers is bound to "end in tears".’,21985,20832000-664,00.html.

It would appear that time looms close. I find the fact that private equity is looking in notoriously unstable regions of the planet for ever diminishing returns alarming. With derivatives markets leveraging somewhere around 4 times global GDP, the ramifications to an unwinding there could be vast. It could very well end in tears for more than those who participated in the investments.


Anonymous ilanit said...

The record-breaking fundraising by several large buyout/growth equity funds (“mega-funds”) over the past couple of years has

led to heightened demand for people to help Los Angeles business

those funds. Specifically, the increased competitive pressures for top talent pushed compensation higher at the

mega-funds and had a trickle-down effect throughout the industry pushing compensation up at the mid- to larger-sized funds

which had to keep pace if they wanted to retain and attract top talent.

Wednesday, March 19, 2008  

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