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 may 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 agency Standard & Poor’s says 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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Filed under: The Blackstone Group, Private equity industry

A good quote has been making the rounds in cyberspace. It comes from a New York Times article about the say of the private equity industry these days:

“They see the handwriting on the wall,” stated Martin S. Fridson, a leading expert on junk bonds, said of buyout firms. “They’re staring into the jaws of hell.”

The message is as true today as it was last week when the original article came out. Here are some of the key data points from the piece:

• Blackstone (NYSE: BX) earnings tumbled 89% in the final three months of 2007.
• On paper, Blackstone’s CEO Stephen Schwarzman has personally lost $3.9 billion as the price of Blackstone’s stock has sunk — and that loss is even bigger this day, as Blackstone’s stock continues to fall (as of Thursday morning, it is below $15 a share).
• Banks are saddled with billions of dollars of buyout-related debt they can’t sell, serving as the next possible wave of write-downs after the subprime mortgage debacle. Citigroup, Goldman Sachs and Lehman Brothers are currently holding what some analysts estimate is $130 billion in leveraged loans, or those supporting private equity deals.
• Surveying junk debt offerings since 2002, the analytical firm FridsonVision found that companies taken private tend to suffer more distress than their peers.

Amazingly, a former Blackstone executive claims that no one saw this collapse coming: “‘No one saw this kind of outcome,’ Michael Holland, chairman of the New York investment firm Holland & Company, and a former Blackstone executive, said of the buyout industry’s troubles.” It’s hard to know what to make of that. Is this statement evidence that at least some bankers believed their own hype, that what goes up never comes down?

But the more practical question is, when are things likely to turn around, or at least hit bottom? Not until the market has fully accounted for the bad debt stuffed into all the corners of the global capital system. And that may take a while. As Hamilton James, Blackstone’s president, put it: “Our view is that things will get worse before they get better.”

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Filed under: Engagements, Private equity industry, Shareholders, Public or private?

Getty Images, Inc. (NYSE: GYI) has had a class action lawsuit filed against certain officers and directors by the Law Offices of Brian M. Felgoise, P.C. The goal of the lawsuit is to seek the highest possible offer for the public shares in connection with the buyout from Hellman & Friedman, LLC for $34.00 per share.

On the surface you might concur that “the highest price” wasn’t obtained or wasn’t well negotiated. After all, Getty Images shares traded north of $50.00 last year and traded north of $80 in much of 2005 and part of 2006. There’s just a problem that is too hard to blame on Getty, its management, and its employees: its business dominance peaked and its relative strength to hundreds or thousands of start-ups and emerging companies has come and gone. And the sad part is that there’s nothing it can do about that.

The virtual industry de-merger of Getty was something we predicted quite well in our subscriber newsletter posted last May, and the only thing we didn’t get right was not being negative enough in a fast enough period of time. Our exit came in August, 2007 rather than in early to mid-2008.Shortly after that, we noted that Getty looked like a value stock that may just be a value trap.

Getty has made numerous acquisitions to try to win more in the digital rights space, but there are just too many small competitors that can operate for nearly free. Frankly it did what it could and was aggressive to be able to compete in royalty free images and then in other media acquisitions. Management isn’t to blame so much here. Some businesses can easily be ruined by crowdsourcing and that’s the case here. In fact, and school with a massive exchange program could “wiki” the entire model.

Here’s the good news, Getty will always survive as long as its exclusive photo and video rights are in tact for live events such as concerts and sporting events. But its days of charging $200.00 to newspapers and web media outlets for a digital photos of a broken fire hydrant or a bear waiting for fish in a river are gone. It can’t acquire everyone.

Sure, this seems like a “thanks for nothing” private equity buyout on the cheap. But there was a time that it looked like no one was going to offer anything above $30.00. Sometimes the news isn’t good no matter what you try. And sometimes the less-bad news is better than nothing. As a public company, Getty would have had more than a very tough road ahead of it.
Hellman & Friedman got a steal on the Doubleclick acquisition which the firm sold to Google (NASDAQ: GOOG). But this deal is harder to see a grand end game in, or at least anywhere along the same lines. This class action may do more harm than good.

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Filed under: Management, Raising money, Engagements, Venture capital industry, Private equity industry

Some scandals wreck public figures on Wall Street, while others act as mere speed bumps. It looks like the latter is true for Frank Quattrone, one of the most influential investment bankers in the 1990’s who was also the head of the Credits Suisse (NYSE: CS) technology banking group.

Frank Quattrone has just announced that he and some former colleagues are launching a new financial services venture called Qatalyst Group. Qatalyst will be a technology-focused merchant banking boutique headquartered in San Francisco, CA.

Qatalyst Partners, its investment banking business, will provide high-end merger & acquisition and corporate finance advice to technology companies. Its investing business, Qatalyst Capital Partners, will make selective principal investments, typically alongside leading venture capital and private equity firms.

Qatalyst Partners notes in its release that it will provide “high quality, independent advice to the senior management teams and boards of the technology industry’s established and emerging leaders on strategic matters crucial to their growth and success.”

Qatalyst will combine a broad network of relationships with deep sector knowledge and seasoned M&A expertise. In addition to merger & acquisition advice, Qatalyst Partners will also advise companies on capital structure and capital raising alternatives, and will selectively raise private capital for clients.

While it will not engage in public securities research, sales, trading or brokerage, Qatalyst Partners might participate as advisor or underwriter in clients’ public offerings.

It looks like Wall Street just got a new technology boutique that’ll be involved in venture capital, private equity, and bringing companies public.

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Filed under: GS Capital Partners, Private equity industry

While Goldman Sachs Group, Inc. (NYSE: GS) managed to beat earnings handily, there’s a key metric for private equity investors. That metric isn’t that Goldman Sachs beat greatly lowered earnings targets nor that shares are up 8% after earnings.

Goldman Sachs noted that it ranked first in global mergers and acquisitions for its fiscal year to date. But there was a key drop in investment banking revenues. Its $1.17 billion in revenues in the investment banking segment were 32% lower than the first quarter of 2007 (year over year) and were down 41% from the fourth quarter of 2007 (sequentially). That signals a slower annual trend but an even slower trend in the near-term has occurred.

More specifically, its net revenues in Financial Advisory Services were $663 million, down some 23% from the first quarter of 2007, reflecting a decrease in industry-wide completed mergers and acquisitions. Its net revenues in its Underwriting segment were $509 million, 40% lower than the first quarter of 2007. On that it notes significantly lower net revenues in debt underwriting, due to a decrease in leveraged finance and mortgage-related activity in difficult market conditions.

The bad news is that is not showing any immediate reprieve in the arena of private equity lending, nor in the number of mergers. The good news is that we should have already known this. There is a giant de-leveraging transition happening on Wall Street (and Main Street for that matter). This may be the new norm for the time being.

2006 and 2007 were more fun to cover the M&A frenzy, but the deals started getting stupid. This isn’t at a all the death of of private equity nor will it be the death of M&A. The billionaires might have to make more normalized acquisitions from here on out, and they might even even have to use mostly their own money.

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Filed under: Deals, The Blackstone Group, Rumors, Private equity industry, Investments, Activist investing

This morning we’ve several pieces that are key for buyout and private equity investors alike. Deals are continuing as you’ll see below, but they are not as traditional in public to public deals, and private equity deals will be looking different than 2007 (duh!). Here is a digest of some of the deals:

Nationwide Financial Services, Inc. (NYSE: NFS) has received a buyout offer from its parent company, which already controls the company via a Class B share ownership. This will end up being a mutual insurance company again rather than a stock insurance company. At least that’s the case if it concurs to be purchased.

Iomega Corporation (NYSE: IOM) received a buyout offer from EMC Corp. (NYSE: EMC) that would be for $3.25, although the board has snubbed the offer. If you look at the history you’ll comprehend why.

The Blackstone Group, L.P. (NYSE: BX) posted earnings this morning that were under estimates and actually were a net loss after charges. You’ll want to see the comments from Steve Schwarzman, because this will show you the tone for 2008 in private equity land. At least they’ve a good dividend now…..

A complicated-sounding deal came this morning, that is really in essence not complicated. White Mountains Insurance Group, Ltd. (NYSE: WTM) is essentially buying back a 16% stake held by none other than Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A).

The rumors or speculation surrounding Sprint Nextel Corp. (NYSE: S) are continuing, yet it is having nearly no net impact on the stock. Speculators have been noting Carlos Trim of Mexico might want to bundle this one or that even Deutsche Telecom (NYSE: DT) may want to bundle it up either in a buyout or in a strategic investment of sorts.

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Filed under: Raising money, Private equity industry, Investments

Yesterday, a story came across Business Wire that was far from a normal private equity story.

A newly-created firm called Javan Capital Partners LLC has apparently bought several businesses from what’s said to be a great young entrepreneur named Artin Afsharjavan, for a total of $6 million in cash and equity. What those exact terms are may be something else, but here’s where the deal is different than 99.99% of all announcements of the sort: he is listed as being 19 years old, and it says he had already invested $2 million in Javan before this one shut.

The businesses bought include Restaurant Javan, a Persian restaurant located in Bethesda. This also includes L3 Investments, Continental Alliance Corp., RentSeek.com, USARecalls.com, HillStreetDiamonds.com, and L3 Transportation.

If you look over this, it sounds like the new firm wants him opening new operations rather than operating these other businesses. Robert Long, vice president of acquisitions at Javan Capital Partners, said they approached him about purchasing his companies to grant him devote more time to Javan Capital Partners.

There may be a bit of a PR ploy here, as Javan Capital Partners noted that it is continuing to raise additional capital and is about to close it to new investments until some time in 2009. You can go poke around at all of these sites to see what your think on your own because some of the sites are down or say they are being relaunched as of this day.

I haven’t been able to confirm any of the comments from the press release, so you’re on your own. I thought going to work for a stock broker at 18 was impressive, but this looks care about it blows that away.

Business Wire has another story about him buying a retail granite chain last month and YoungEntrepreneur.com has a profile you can see. Congratulations to him if the terms are all straightforward as they were laid out in the main release

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Filed under: Deals, Private equity industry

If there was ever a long-standing company in the bicycle making business, it is Cannondale. In fact, Cannondale used to be a public company that traded under the stock ticker “BIKE” before it imploded and went bankrupt. This was ultimately acquired by private equity, but it wasn’t a public buyout. The higher-end bike manufacturer was bought in bankruptcy in 2003 and the prior common shareholders got a total tax write-off.

This morning Forbes ran a story from Thomson Financial out of London noting that Princess Private Equity Holding Ltd. has now sold Cannondale Bicycle Corp. for between $190 to $200 million through its partnership Pegasus II partners. Cannondale was purchased out of bankruptcy by Pegasus II for almost $60 million.

A 200%+ gain in nearly 5-years isn’t too simple to knock. Let’s hope the buyers can run this one superior than it was run the first time around.

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Filed under: Food, Ripoffs and Scams, Health

According to MarketWatch, some diners in San Francisco got a nasty surprise recently when they found, on their check, an added charge for the health care of the restaurant’s staff. The charge is a plea from the owners for recognition of the burden placed on them by a new city law requiring them to offer their workers health care coverage.

The local restaurant association has filed a lawsuit attempting to overturn the mandate, which could be ruled upon within the next few weeks.

I hope the owners receive a lot of complaints, for fear that the concept could grow out of control. In my nightmare, where our nation’s restaurants are asked to collect for more of our national social programs, the bill might look like this:

Coffee…………………………………….$1.65
Fish sandwich……………………….$7.95
Healthcare…………………………$745.00
Social Insecurity………………….$65.00
Childcare…………………………..$125.00
Eldercare…………………………..$335.00
Iraqicare………………. $63,550,000.00
Subtotal……………….. $63,551,279.00
Tax…………………………. $4,448,589.00
subtotal……………….. $67,999,868.00
Tip…………………………………………$2.00
Total………………………$67,999,870.00 No checks accepted.

While New Yorkers may be used to a restaurant bill of this magnitude, it will come as a shock to those of us accustomed to the menu prices of Waffle Houses in fly-over America.

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Filed under: Extracurriculars, Ripoffs and Scams, Career

Many of us harbor the ambition to write novels (and some of us, such as WalletPop’s Tobias Buckell, have several in print already). Part of the dream for me is making enough money to allow me to concentrate strictly on fiction. Unfortunately, that dream is becoming less and less feasible.

Two disheartening pieces of news are buzzing the book world this week. The first involves Amazon, the 500 lb. gorilla in the field.

A growing number of authors have chosen to self-publish via print-on-demand companies such as iUniverse. An important part of their profit plan is distribution through Amazon. Now, however, Amazon has decreed that it will no long act as the middleman between POD -published authors and the public. Any POD author wishing to have his/her book on Amazon must have the book printed via Amazon’s BookSurge POD service.

The move makes sense from Amazon’s point of view; they won’t need to keep a stack of actual books on the shelf waiting for orders, or spiff other companies to direct-ship from their warehouses. When an order comes in, Amazon will route the digital file to the printing process and voila, pop a book out the other end ready to shop. For the authors, things are not so rosy. Once Amazon runs competing POD companies out of business, authors risk losing leverage and the consequent income.

Another troubling story, in the New York Times, is the intent of publisher HarperCollins to launch a new group to publish books for which authors will be paid a share of revenues rather than an upfront against royalties. In the past, a writer would get a lump sum at the time the contracts were signed. If the book sold well enough to exceed the anticipated revenue on which the first payment was based, the author would receive additional money. If it didn’t, the publisher ate the shortfall. Because the rewards of success derive primarily to the publisher, I believe the danger should as well. To ask the author, who has no control over production, marketing or placement, to shoulder that risk is a sad commentary on the say of the art.

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