With refinancing activity in high gear, deal flow picking up
and IPOs sprouting left and right, the reports of private
equitys demise appear to have been greatly
The roots of the asset classs expected downfall are
not hard to come by. The fall of Lehman Brothers Holdings in
September 2008 kicked into overdrive the worst downturn since
the Depression and saw the credit markets dry up. During the
second quarter of 2009, U.S. gross domestic product had
declined 6.4 percent.
A look back at recent PE events illustrates why this asset
class has been extraordinarily successful doing what other
organizations fail to do align management, investor and
director incentives to foster accountability and drive the
wealth creation process.
In December 2008, Boston Consulting Group released a report
predicting that 50 percent of PE portfolios companies would
default on their debt and 40 percent of buyout groups
shutter their operations. In February 2009, Jeremy
Grantham, chairman of money-manager GMO, called PE the
most under-appreciated source of future write-downs and credit
By spring 2009, PE firms such as KKR, TPG and Blackstone
Group were marking down the value of their investments by more
than 30 percent, in line with the fall in the stock markets. In
May, Standard & Poors reported that private
equityrelated companies made up more than half of the 300
companies on its weakest links list.
By May 2009, Howard Marks, chairman of distressed firm
Oaktree Capital, made the unremarkable (at the time) statement
that creditors are about to become the owners of many
companies. Equity owners will be wiped out.
Who could beg to differ? The global economy was in a
tailspin and the business faced a staggering Re-Fi
Cliff more than $570 billion in loans from the
2005-2007 LBO boom needed refinancing. For more than a few
competitors and the asset groups legions of detractors,
this was the industrys comeuppance.
This was especially true if one accepted the caricature of
private equity that the business is all about buying
healthy companies, leveraging them to the hilt, selling off
assets, laying off employees and flipping the firm for a quick
profit. Moreover, a business that took full advantage of years
of easy credit to go on the biggest corporate buying binges of
history would sooner or later have its day of reckoning.