Several private-equity-backed companies have gone bankrupt or are teetering on the edge (Linens ‘N Things and Chrysler, for example). And other large PE firms such as Blackstone Group and Fortress Investment have seen their stock prices plummet in 2008.
Nevertheless, compared to investment banking, relatively few people in private equity have actually lost their jobs, according to an article in Vanity Fair by author Michael Wolff. Wolff views this as an “extraordinary demonstration of denial” or simply the real-life expression of his father’s sage advice, “You’re not bankrupt until people know you’re bankrupt.”
One reason, according to Wolff, is that private equity firms have several structural advantages over other Wall Street players, such as hedge funds. This includes a longer time commitment from their investors. Plus PE firms received remarkably loose terms from lenders during the leveraged buyout boom, which means they could put much less of their own equity into deals. The lenders are the ones who are really on the hook.
The Vanity Fair article in the February 2009 issue is an entertaining look at what went right with private equity in the past decade and what could go horribly wrong in 2009. Despite the fact that some $4 trillion is due back to private equity lenders in the next year, Wolff says it still seems like it’s business as usual among private equity types – although few, if any, deals are being done right now.
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