Private equity players begin to look at financials — sign of a bottom?
Posted by: in Private Industry NewsFiled under: Rumors, Private equity industry
A good sign of a bottom in an industry or market is when private equity firms begin to get interested. LBO interest indicates that the stocks are so beaten down that some very smart people think they can use debt to buy the entire company, and then use the company’s cash flow to service it.
Now the Carlyle Group, the famed private equity firm that was among the first to spot signs of trouble in credit is “getting close” to buying up beaten-down financials. According to the Wall Street Journal, “In July, the firm hired Edward “Ned” Kelly, former chief executive of Mercantile Bankshares Corp., to head a new, 10-person team to look for financial-services deals. His focus includes distressed businesses where a jolt of Carlyle capital could help mend things. He also is watching big, integrated financial-services companies that might need to divest themselves of solid subsidiaries to raise cash in a hurry.”
KKR has also expanded its team looking at financial services stocks. Should ordinary investors follow suit? I’m not so sure. There are tremendous transparency problems associated with the sector, as the wave of surprise subprime writedowns showed. It’s hard to do securities analysis to determine if a stock is a good value when the financials aren’t reliable.
You might miss out on a great buying opportunity by waiting for more information and disclosure, but that’s a price I’m willing to pay. Buying companies with financials you don’t really understand isn’t value investing: It’s speculating.
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