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June 27, 2007Will SFAS 157 make it more difficult to raise capital for PE and VC funds?
This past week I attended a valuation conference focused on private equity at the Tuck School of Business at Dartmouth. The main topic of discussion was SFAS 157 and how it might impact the fair value reported by GPs to LPs. The discussion at times became heated, as several GPs were still debating that cost was the best indication of value, while representatives from the Big 4 were saying "that ship has sailed". The Big 4's rationale was that with the passage of 157, they would be relying on the new FASB statement as the guidepost for the carrying value of investments for auditing purposes. Most of the GPs argued that cost was a conservative measure and often the most appropriate indication of fair value.
June 19, 2007The Beginning of the End of the Private Equity Run?
For years private equity firms have enjoyed cheap money and low interest rates, which they have used for countless deals and unprecedented success. However, concerns about rising rates in the Treasury bond market are raising worries. Could this be the beginning of the end of the cheap money cycle so imperative to their success?
On June 12 the yield on the benchmark 10-year Treasury note reached 5.25 percent, its
highest in the last twelve months, up from 4.67 percent the previous month. This increase in bond yields has fueled worries that it will be more difficult to borrow money going forward. Large investors, such as pension funds have invested billions in private equity in search of high yields. But now some of these investors may reevaluate where the opportunities really are and in turn slow the amount of money flowing through private equity. Rising borrowing costs could also put pressure on private equity at a time when there is already concern over the high prices being paid for deals. However, notwithstanding the possible slowdown, most analysts agree that while credit may start to tighten, it will take much more than a gradual increase in interest rates to derail private equity.
June 13, 2007Time for the Private Equity Groups to IPO?
Why does an IPO make sense for a private equity firm, but not for the
portfolio companies they own? This question continues to nag at me, as I
wonder how long until a private equity firm takes a private equity firm
private, so they can avoid those nasty quarterly earnings calls and take a
more long-term investment view. Should we, the individual investors, play in
this game? Part of me says, if Steve Schwarzman is selling I am not buying.
Yet, owning an interest in Blackstone has proven to be a tremendous
investment and having access to some of the strongest best performing funds
in the world could be a phenomenal opportunity to further diversify your
portfolio with a quality proven financial investor. Is now the time to
purchase an investment in private equity as multiples, returns and premiums
all have trended upwards significantly in the past four years? Is the buyout
world just beginning or is it about to crack? Will the public markets crack or
fuel private equity groups? Will they now begin to face the same pressures
that crippled their portfolio companies: 1) quarterly earnings pressures; 2)
the high cost of public compliance; and maybe worst of all 3) be forced to
dissect the value of their investment portfolio and reveal the inner
workings of their powerful investment process? A new paradigm may well be
upon us...wait, as someone once told there "are no new paradigms". What goes
up must...
