Monday, March 2, 2009

Private equity markdowns

Warren Buffett had this to say about private equity:

Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private.

Maybe people say that Buffett has a bone to pick with private equity, since he bought bonds on TXU, that KKR and TPG took private, and since he has also sold puts on high yield bonds.

No one trusts the marks on banks balance sheets, and no one trusts the marks that private equity give their business. How much is the haircut?

Let's look at KKR. Last year KKR said that the value of it's holdings dropped 32% last year.

Does anybody believe them?

If financials commitments on "private equity" are selling in the secondary market at 40% on the dollar, who believes KKR's marks?

KKR Private Equity trades at $2.25 on Euronext. It's net asset value is $12.78.

Nobody does.

Remember when Judas betrayed Jesus with a kiss? Peter was so ticked, that he cut of the ear of Malchus, the servant of the high priest.

Private equity betrayed main street. But these high priests of Wall Street haven't just given bondholders just a haircut.

They've cut off their ears!

And they can't even stop the bleeding!

No comments: