Filed under: Major movement, Headline news, DJIA, Lehman Br Holdings (LEH)

Where there’s fear, there is opportunity. Each day for the past six months some have asked if it was time to get back into investing in the financial sector. I was way too early and now much poorer for it. Whether I’m too optimistic about our economic vitality, or just have no fear, or both, is a lingering thought in my mind.

Today marks the first day of a new quarter and there seems to be a lot of good will in the air. This even though UBS AG (NYSR: UBS) announced that it will write off $19 billion. UBS writedowns have reached a staggering $40 billion in the past nine months, the largest reported by any bank to date. As UBS Chairman Marcel Ospel stepped down, Deutsche Bank AG (NYSE: DB), Germany’s largest bank, announced similar writedowns of about $4 billion.

Apparently, these losses by foreign banks have made Wall Street traders giddy as the Dow Jones Industrial Average was up over 200 points in early trading. Could this be the bottom? Well, I’m not going to call it — I have no idea.

In other news, U.S. investment bank Lehman Brothers Holdings Inc. (NYSE: LEH) late Monday stated it would sell 3 million convertible preferred shares due to “investor interest.” The fact that UBS and LEH have shown the capability to raise cash as needed might be the sign traders have been looking for as it gives the impression that market liquidity is returning.

Maybe the turning point relates to all the writeoffs and writedowns in another way. Perhaps, the losses have now shown up in the projected taxes about to be paid by banks and investors, OR NOT – meaning cash held as tax reserves can now be redeployed into the market.

There are many ways for individual investors to play the market. You can make contrarian bets on the most downtrodden institutions with the diversity, scale and balance sheets to withstand high tide, or you can invest in an exchange traded fund or mutual fund focused on the financial sector. Either way, you might be swimming with sharks.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money.

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Filed under: Financials and analyticals, Private equity industry

JP Morgan Chase & Co. (NYSE: JPM) has announced the launch of DealVault. This is a new technology that tracks private equity investments valuations, performance, risk and exposure analysis. JP Morgan’s unit called Private Equity Fund Services (PEFS) developed the system to provide CFOs, deal and investor relations professionals with a platform to centralize deal tracking information.

DealVault will also integrate with bookkeeping and back office systems, in order to allow administration one platform. Private equity managers will be able to store portfolio company information in a web-based solution, package information in an auditor-friendly format, allow independent valuation reviews, and to cut time spent aggregating and reconciling volumes of data.

This “PEFS” unit already provides a full suite of administration services to private equity firms, real estate firms, and institutional investors; and it currently services more than 200 funds representing $50 billion in committed capital, and serves the world’s largest institutions with $110 billion in aggregate committed capital across thousands of private equity investments.

Does something seem wrong or off about the timing of this launch? In 2006 this would have garnered much attention. In 2007 it would have been mandatory. While the billionaires are all supposed to be immune to economic sensitivity, that just isn’t quite holding up right now. Another wave of private equity will come again, at least that’s what history dictates. But the launch timing is probably one that could have been picked better.

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Filed under: Private equity industry, Management fees

It’s a scary thing for investment bankers: the “credit crunch.” It has essentially depleted the industry, as dealmaking has shrunk significantly.

In fact, according to Bloomberg, there was a 35% drop in M&A fees for Q1.

True, the M&A business is known for its “feast-famine” cycles, but this time it looks like things could be particularly bleak - and perhaps long lasting. Just look at the breakdown of the $19.5 billion buyout for Clear Channel Communications (NYSE: CCU).

Basically, financial institutions are in the process of repairing their balance sheets, and as a result, don’t have the firepower to finance deals — especially huge ones. In fact, these firms need to find ways to deal with more than $200 billion in LBO loans.

There is also prone to be a slowdown in strategic acquisitions. That’s, as the US economy slows down - which might impinge the global economy - where buyers are apt to get jittery. Why take big risks in such an environment?

Now, there are offsetting factors such as the emergence of mega sovereign wealth funds. However, they may get some political pushback.

In other words, don’t anticipate a comeback anytime soon.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

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Filed under: Deals, Venture capital industry, Private equity industry, Public or private?

AirNet Systems, Inc. (AMEX: ANS) has entered into a definitive merger agreement with an affiliate of Bayside Capital. The size of this deal is tiny when you compare it to the huge billion dollar club deals, but deals of this size also have a much better chance of being able to be financed and the size is such that banks won’t have to come up with three million excuses not to fund.

AirNet Systems is a provider of specialized cargo airline and expedited transportation solutions for time-critical shipments like people that must get somewhere 10-minutes-ago, items like canceled checks and other key parcels. Here’s their route structure that it operates in a spoke system if outside of that group. The website says that the company operated 130 aircraft, even though that appears to be an old figure.

The company will be acquired for $2.81 per share, a transaction valued at $28.7 million. The offer represents a 94% premium to Friday’s $1.45 closing price.

As already noted, the size here is tiny. But this niche is one that sees steady interest from public companies and private companies in what feels like a “regardless of the economy stance” over the last decade. What’s even more interesting is that the size of a deal like this crosses over with venture capital players, even if it is already a developed company. VC’s have funded many logistic and niche shipping companies over the last decade and there has been a major consolidation of the smaller players.

The board approved the transaction and awaits shareholder approval in a special meeting. The current management team will continue to manage the company upon completion of the transaction which is expected to shut in the second quarter of 2008. AirNet shares are up over 80% this day to $2.63, representing a $26.7 million market cap. The 52-week range is $1.38 to $3.69, so this might not be a 100% assurance that all shareholders will vote along with the deal.

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Filed under: GS Capital Partners, Private equity industry, Shareholders, Public or private?

There has been quite a bit of buzz around the trends in special purpose acquisition companies, or SPAC’s, of late. In fact, it seems that about two of every three IPO filings that get filed are from SPAC’s. These SPAC IPO’s offer the public essentially a call option to participate in private equity that will end up being publicly traded stocks. Ultimately, these will become operating companies or within 24 to 30 months investors will receive their cash back minus a few percentage points.

Attention is still being given to the fact that J.W. Childs Acquisition I Corp. was filed to raise $200 million. This was two weeks ago too. Some have asked if J.W. Childs is testing the water here or if this is because they would have trouble raising a private equity fund on their own. If you want a confusing explanation, the answer is “both and neither.”

SPAC’s are changing as well. In the past, Goldman Sachs (NYSE: GS) has avoided SPAC’s and blank check offerings. The reason is that the stigma behind these from the 1990’s wasn’t a good one. All things change in time. Goldman Sachs just filed for its SPAC initial public offering this week. They also made the terms slightly more tight than most other underwriters.

Opinions on traditional private equity firms going into SPAC launches vary already and they will vary only more in the future. But this strategy makes life easier for the private equity firm. For starters, they don’t have to go run through all the hoops associated with raising a private equity fund. They don’t have to use their own sales or biz0dev team to go spend the 90 to 180 days or longer due diligence period. This grants them to make the brokerage underwriting firm go do the leg work and grants them to distribute units that are publicly traded to retail and/or institutional clients. It also gives the private equity firm a two-year time frame as breathing room to go pick their deals.

Arguably, it even grants the firms to go through other private equity firms’ portfolios to see if there are businesses or units that can be purchased that would have otherwise been stuck as a buried entity.

There are many critics of SPAC’s and traditional blank check IPO’s. But this may be a trend you don’t have to care about. You just have to accept it for what it is.

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Filed under: Madison Dearborn Partners, Providence Equity Partners, Private equity industry

BCE Inc. (NYSE: BCE) is recently down 80 cents to $35.26.

BCE, Canada’s largest telecommunications company, announced on June 30, 2007, that it concurred to be acquired by an investment arm of Ontario Teachers Pension, Providence Partners and Madison Dearborn Partners for an announced deal price of $42.75 per share. The Federal Communications Commissions cleared the deal on Dec. 20.

BMO Capital Markets says, “we reiterate our view that BCE stock could trade down to $27 should the deal break and trade in the $30 range on a seasoned basis.” BCE May option implied volatility of 48 is above its 26-week average of 31 according to Track Data, suggesting larger movement.

M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

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Filed under: Deals, Bain Capital, Thomas H. Lee Partners, Private equity industry, Public or private?

Clear Channel Communications Inc. (NYSE: CCU) looks like they are just going to have to stay public. Shares shut down over 5% to $32.56 on the day but shares are down over 15% to $27.40 in after-hours trading. The Wall Street Journal has reported that the $19 Billion club-deal with private equity firms Thomas H. Lee and Bain Capital Partners LLC and their bankers is all but dead.

This has been covered here with more than skepticism as the real chances of the merger closing, usually with plenty of email responses claiming all is well.

If this deal does end up getting closed, it may get to apply for the Guinness Book of World Records for the biggest and longest merger in history. This volatility behind this merger is starting to look like a soccer match played by kindergartners on a hockey rink.

Someone please just turn out the lights and call this game a loss or a draw.

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Filed under: Financials and analyticals, Private equity industry, Management fees

It’s been a year since Fortress Investment Group (NYSE: FIG) went public. At that time, the offering got a nice reception. After all, investors were hungry for hedge fund and private equity operators.

Of course, that’s no longer the case. And the stock of Fortress has gone from $34 to a low of $9.50.

Well, this week, the firm announced its fiscal Q4 results. There was a net loss of $29.3 million, or $0.43 per share and pre-tax distributable earnings were down 43% to $78 million, or $0.18 per share. Revenues were also lackluster - falling 22% to $196 million. Even though, with a big amount of assets under management (roughly $33.2 billion), Fortress saw a 43% spike in management fees.

With the roiling credit and equity markets, it’s tough to complete deals. As a result, there hasn’t been much chance to realize gains.

Despite all this, the Fortress conference call was upbeat. Keep in mind that the company focuses on asset-based investments, which tend to have less leverage and lower valuations. Besides, as major banks repair their balance sheets, there should be opportunities for players like Fortress to get some choice deals.

Interestingly enough, Fortress thinks that the second half of 2008 will be quite active. And, if the company can scoop up some transactions at compelling valuations, it could position itself nicely for the next couple years, when things get back to normal.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar On the internet Guide to Decoding Financial Statements. He also operates DealProfiles.com.

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Filed under: Deals, Venture capital industry, Private equity industry, Investments

This morning there was a rather interesting private equity venture. The AES Corporation (NYSE:AES) and Riverstone Holdings LLC, a New York-based energy and power-focused private equity firm, have announced that they’ve committed up to $1 billion as part of a new joint venture. This joint venture will develop utility-scale solar photovoltaic (PV) projects. Translation: huge projects for communities more than small individual projects. This deal isn’t unique, but it is rather uncommon for traditional private equity.

This will be called AES Solar, and AES and Riverstone will each provide up to $500 million of capital over five years to invest in PV solar projects globally. This follows the traditional independent power producer and wind business growth models noted geographically with favorable tarrifs and incentives. AES also noted that alternative energy currently accounts for 20% of its global generation capacity. The joint venture will be managed by a seven-member board of directors and three directors each will be appointed by AES and Riverstone. It noted that the target is for power grids that range from two to fifty Megawatts in size.

This is not the first such venture in the sector, but this is a rather massive commitment in the current environment. This almost sounds like chasing a hot sector after the likes of Al Gore’s deeper involvement in investing in the sector from November. It also seems more “VC-esque: than traditional private equity. The lines between private equity and venture capital may be blurring further as capital competes for more deals.

Riverstone has invested in other green and traditional ventures, and here are its other portfolio companies.

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Filed under: Financials and analyticals, Raising money, Private equity industry, Investments

There has been much talk about how the credit squeeze and slowing economy has affected the public markets, but how has it affected private-equity firms? An article in the Hartford Business discusses how private equity firms are feeling the pain, especially as many private-equity owned companies have very high risk ratings and default risks. This appears to be more concerns of the past coming to fruition over leverage and credit quality more than breaking news, but it might come front and center before long.

Additionally, private equity-backed companies have large debt loads and when combined with decreased consumer spending, companies have less cash to service those loans. Leverage has enhanced returns, but it also augments the losses and decreases the returns to the private-equity firms that own the companies. This states that 25 of the 42 companies that ratings bureau Standard & Poor’s states have the lowest credit ratings are owned or controlled by private-equity firms, which gives them the highest chances for default.

It also appears that many private-equity firms overestimated the potential value and performance of the companies they bought, or at least that conditions exists now that credit is tight and the economy slower. If many industries and sectors are struggling in today’s economy, it should come of no surprise that private-equity firms that bought them with leverage are feeling the burn as well. A less-leveraged economy isn’t leaving the billionaires entirely immune.

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