David Haarmeyer

With refinancing activity in high gear, deal flow picking up and IPOs sprouting left and right, the reports of private equity’s demise appear to have been greatly exaggerated.

The roots of the asset class’s 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 chaos.”

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 & Poor’s reported that private equity–related 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 group’s legions of detractors, this was the industry’s 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.