Thursday, June 24, 2010

Putting your money where their mouth is

Guambat is sure there must be some social value somewhere in the private equity concept, but he'd be hard pressed to put a finger, let alone a paw, on it. Maybe once, if ever, the government starts to tax their income as ordinary income as it would for the rest of us, it might be easier to spot.

It might also be interesting to see the result of the following "conundrum" and the fall out it generates before trying to make that decision.

Private Equity Firms Have Billions and Nowhere to Spend It
Corporate buyout specialists generally raise money from big investors and then buy undervalued or underappreciated companies. To maximize investment returns, they typically leverage their cash with loans from banks or bond investors.

Critics contend that leveraged buyouts can saddle takeover targets with dangerous levels of debt. But unlike indebted homeowners, highly leveraged companies under the care of private equity have so far dodged the big bust many have predicted.

After an unprecedented burst of buyouts during the boom leading up to 2008, a vast majority of these companies are hanging on. Whether they will avoid a reckoning is uncertain.

Private equity funds generally tie up investors’ money for 10 years. But they typically must invest all the money within the first three to five years of the funds’ life.

For giant buyout funds raised in 2006 and 2007, at the height of the bubble, time is short. They must invest their money soon or return it to clients — presumably along with some of the management fees the firms have already collected. Some of the industry’s biggest players, like David M. Rubenstein of the Carlyle Group, Henry Kravis of Kohlberg Kravis Roberts and David Bonderman of TPG, have more than $10 billion apiece in uncommitted capital — what is known as “dry powder” — according to Preqin, an industry research firm.

A big drop in returns would be particularly vexing for pension funds, which are counting on private equity, hedge funds and other so-called alternative investments to help them meet their mounting liabilities.

Some buyout firms are asking their clients for more time to search for companies to buy. Many more are rushing to invest their cash as quickly as possible, whatever the price.

Still, those with dry powder are bidding aggressively, in the United States, Europe and Asia.

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