Filed under: Raising money, Private equity industry

This week’s Barron’s reports that private equity funds are still raising plenty of money. The third quarter of 2007 saw a record level of money flowing into private equity funds, over $66 billion. The fourth quarter wasn’t far behind at $51 billion , suggesting that investor interest in private equity funds remains strong.

The large change is the the size of the funds and the deals they do. Smaller funds set a record for money raised in the fourth quarter, while larger funds saw their take fall by over 20%.

Even though these numbers seem to have surprised some analysts, they make sense. Conventional equity investing looks less attractive as corporate profits are likely to soften. As a result, sophisticated investors look for returns elsewhere, especially in smaller funds doing deals for lesser known companies. In times of market instability, private equity funds tend to see more not less investment.

So while the mega-deals of the last few years fade away for a while, anticipate to see more smaller deals for companies you’ve never heard of.

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Filed under: Private equity industry

The private equity industry has been at the top of the wish lists of elite business school graduates for the past few years, but those eager young people might find that the industry isn’t as generous as it wasn’t too long ago.

The Wall Street Journal reports (subscription required) that “Leveraged finance is down 82% this year, while announced M&A is down 64% and fee income from private-equity firms is down 74%, according to data from Dealogic and Banc of America Securities analyst Michael Hecht.”

Over the past few years, the ranks of Wall Street workers involved in deals have soared on hopes that the private equity boom represented a new paradigm. As with most new paradigms, this one proved illusory.

Consistent with the rise in new hires, revenue per employee at top investment banks fell sharply in 2007 and, if the numbers cited by Mr. Hecht represent a continuing trend, we could see another, more massive decline.

Note to MBA students: those less glamorous companies that actually, say, make stuff might be on to something.

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Filed under: Bain Capital, Private equity industry

3Com Corp. (NASDAQ: COMS) is seeing a severe snag in its acquisition process, and one that appears may actually kill the merger. This morning it has announced along with affiliates of Bain Capital Partners, LLC and Huawei Technologies that the parties have withdrawn their joint filing for a merger approval to the Committee on Foreign Investment in the United Says.

In the release, the company noted that it was disappointed that it was unable to reach a mitigation agreement with CIFIUS to secure the necessary merger approval. 3Com’s board of directors approved the merger back on September 28, 2007. While both parties remain committed to continuing discussions, it is fairly difficult to imagine that they’ll be able to overcome government oversight.

3Com is going to have to go back to basics and focus on its own business plan for the time being, regardless of continuing discussions. Read the rest of the backgrounder at 247WallSt.com.

Jon Ogg is a partner and editor of 247WallSt.com.

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Filed under: Private equity industry, Investments

Just when you think private equity is dead, large news break. Reuters has reported that private equity firm Blue Ridge has just raised $1.45 billion for a new private equity fund to invest in Chinese companies. This follows most of its 2006 fund of $300 million being mostly committed.

The Chinese have already taken steps to cool red hot growth in China, but apparently some can still find value there when others might not be able to take advantage of the situation. When you see the U.S. banks and many of the European banks in more and more trouble and with write-downs growing, it is no surprise that newer and previously less-known funds may get their chance to rise. Blue Ridge doesn’t have to worry about answering endless questions on things like CDO’s, mortgages, credit woes, and the like.

The target sectors are energy, retail, real estate, technology and consumer products. Reuters put the time frame for this fund at five years, which is actually rather short for many “CHINDIA” funds that had been stating 10-year horizons for China and India in the not so distant past. Maybe that is just the new investment climate for you.

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Filed under: Deals, Engagements, Private equity industry

Banks that are lending capital to private equity firms for leveraged buyouts might have a new excuse for the “non-funding” of commitments: their legal departments. The Financial Times reports that legal advisors to banks are starting to advise banks that it may be cheaper for them to not fund these big private equity loans, even if they have to pay a penalty or have to take a hit from a break-up fee.

In an environment where banks have to write-down loans, write-off certain CDOs, and actually have to fight for survival, this might not be too much of a shocker. According to this report, attorneys said that the break-up fees resulting from ending those commitments would be less than the write-downs related to those loans. Envision that. Attorneys advising clients to walk away from their contracts.

It’s no secret that the days of the new giant club deals are done for the foreseeable future. But there’s apparently a new reason that takeover targets can demand either tighter terms or higher break-up fees when private equity buyers come knocking.

Jon Ogg is a partner and editor in 247WallSt.com.

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Filed under: Private equity industry

The default rate on junk bonds in 2007 was well under 1%. Junk guru and finance professor Edward Altman says that number will move well above 4.6% this year. According to The Wall Street Journal, “already in January, Mr. Altman estimated defaults hit $3.2 billion, about 60% of the total for all of 2007.” That means the level of defaults could move well above 5%, if things stay bad.

Junk bonds, or “high-yield” as Mr. Mike Milken liked to call them, touch a much broader spectrum of the economy than most investors would guess. Not only are high-yield bond funds popular with investors, institutions also own baskets of this debt. It is not terribly unlke baskets of mortgages, credit card, or auto loans.

Read the whole story at 24/7 Wall St.

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Filed under: Private equity industry

Banks thought they would make money on everything in 2007. Instead, they made money on nothing. That winning streak appears to be extending into 2008.

One of the most sure-fire schemes at banks was lending money to LBO firms so they could take big public companies private. The LBO analysts were smarter than most investors and people on Wall St. They would find companies which were badly and inefficiently run. Once these firms were bought, they could cut costs and drive up the value of the assets.

Read the entire story at 24/7 Wall St.

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Filed under: Deals, Private equity industry

Stifel Nicolaus analyst George Askew thinks it highly unlikely that a private equity firm will rescue Yahoo! Inc. (NASDAQ: YHOO) from the clutches of Microsoft Corp. (NASDAQ: MSFT).

In a Monday research note analyzing the $44.6 billion offer, Askew says “the financing and operational risks are too high; the cash flows are insufficient; and Microsoft would likely top any competing bid with its own deep pockets and synergies.”

Askew, who previously worked as an analyst for the mergers and acquisitions group at Merrill Lynch & Co., bases his assumptions on a buyout firm offering $36 a share, or $51.5 billion, for Yahoo!, with a 40% equity investment. That equity piece of the deal might include $10.5 billion from the PE sponsor and $4.7 billion from Yahoo!’s founders. The buyout firm would also raise $22.9 billion of new debt, while Yahoo! could raise $12.5 billion by selling stakes in some of its overseas properties, such as Yahoo! Japan.

Continue reading at TechConfidential.com.

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Filed under: The Carlyle Group, Private equity industry

There’s a lot of speak about how bad things are for private equity these days. Deals are going bust and credit is drying up, and some observers have suggested that the golden age of private equity is over.

But Louis Gerstner, the chairman of the Carlyle Group, told the Dow Jones Private Equity Analyst Outlook conference in New York that he rejects all the doom and gloom. As far as Gerstner is concerned, the current situation is not a crisis. It is merely a “correction,” and a welcome one at that. Capitalism tends to go to extremes, and the slowdown in the buyout market is simply a cleaning up period when the excesses can be eliminated.

Gerstner said that Carlyle is holding $30 billion waiting for investment. Weaker players should leave the field this year and next, creating new opportunities for massive, experienced funds like Carlyle. The developing world is also attractive, providing targets that require less leverage.

Read more at Financial News.
Read more at DealBook.

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Filed under: Private equity industry, Public or private?

Some senators from the South still wear linen suits and believe that foreign interests should not own land or a part of any business in the U.S. They also probably still smoke and eat fatty foods.

But the serious side of congressional concern about overseas investments in big U.S. companies and financial firms is that sovereign funds could find a more and more hostile reception to their investments in companies like Citigroup (NYSE: C).

According to the FT, “The Treasury, which considers the discussions with the funds a priority, hopes it can pursue its agenda through the International Monetary Fund, which is drawing up a code for SWF investments, expected in draft form in April.” The document is probably no more than a “feel good” piece of paper that Treasury can wave around in the offices of Congress and regulators.

The fact of the matter is that the government here would like sovereign funds to have different rules than those that govern people like Carl Icahn. If a raider can take over an entire company and break it into pieces, why can’t the same be done by rich interests from Kuwait, if they’ve the money? Any “state secrets” at a firm like Citi can be burned before the process starts, in the name of keeping important government data confidential.

The bonfire from the documents can warm the management as they leave the building.

Douglas A. McIntyre is an editor at 247wallst.com.

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