Oh, how much fun it must be to be everywhere at once.
We're not talking about God here, just in case you fear your Saturday business section has somehow been overrun by evangelicals. When it comes to omnipresence, not even a deity can beat the men and women of private equity, those all-knowing creatures who, while you were sleeping, began taking over (literally) the entire business world. Or so it feels like from reading the week's headlines:
Item: Magna International is nosing around Chrysler, which is being shopped by parent DaimlerChrysler. But most in the auto industry believe it's far more likely that a private equity group -- Cerberus Capital Management and Blackstone Group are thought to be interested -- will be the buyer of the No. 3 Detroit-based auto maker.
Item: After a 45-per-cent plunge in the stock price since going public, a beleaguered Michael Sifton puts Osprey Media, the Ontario newspaper publisher, on the block. Why? Because a private equity firm approached him about a takeover, so it seems like the right time to see what he can get for a declining asset.
Item: Robert Schad, the self-styled eco-hero executive, decides to sell his company, Husky Injection Molding Systems, so that he can use the money to save the Earth. Rumoured bidders? Private equity.
Item: Private equity firm Kohlberg Kravis Roberts and an Italian billionaire team to offer $18.8-billion for Alliance Boots, Britain's largest drugstore chain. If completed, it will be Europe's largest-ever leveraged buyout -- but still smaller than the largest-ever U.S. buyout, which was the big deal of last week.
Private equity has even become a bogeyman, particularly for the screeching lobbyists who are fighting Ottawa's income trust tax. To hear them tell it, the original barbarian himself, Henry Kravis, will soon control half of Calgary. "The private equity firms are already in town," oil patch executive George Kesteven, president of the Canadian Association of Income Funds, told The Globe this week. Real estate trusts warn that if they don't get the exemption they were promised from the tax, they, too, will become targets for private money. If Onex chief Gerry Schwartz were really looking at all the deals he's rumoured to be, he'd have to clone himself.
The reason for all this deal making is hardly a secret: They've got to spend their money somewhere. Private Equity Intelligence, an industry research firm, says nearly 700 private equity firms raised a record $434-billion (U.S.) from investors in the past year and might raise up to $500-billion this year.
As impressive as that may seem, it's not as much as it appears. The market capitalization of all the companies on the Toronto Stock Exchange is close to $1.8-trillion, and it's one of the smaller stock markets in the developed world.
The real juice behind private equity is cheap debt. You borrow $5 for every dollar of equity, and suddenly that $500-billion becomes $3-trillion you can work with. And the evidence suggest that as competition heats up for deals, private equity firms borrow more heavily. Data compiled last year by Edward Altman of New York University found that on average, European buyouts leave their targets with debt of six times current EBITDA (earnings before interest, taxes, depreciation and amortization). In 2002 and 2003, the ratio was less than 4½ times. In North America, the trend to more debt is similar. But pension funds and banks are content to give ever-larger amounts of money to the likes of KKR and Blackstone and Onex because returns have been so good.
There are, however, two immutable laws of investing that apply here: (1) the bigger you get, the harder it is to earn superior returns; (2) it's always easier to be careless with someone else's money. For evidence of the latter, check out New Century Financial, the most infamous blowup yet in the U.S. housing meltdown. Fuelled by cheap money, the U.S. lender gave mortgages to anyone who could fog a mirror, and its stock price rose to nearly $66 by 2004 from a low of $2.50 in late 1998. Alas, it turns out the trailer park boys have been tardy on their loan repayments, and bankruptcy rumours are now rife at New Century.
The moral of that little saga: Cheap, borrowed money is only for those who can use it responsibly. It's one that private equity types had better not lose sight of, even at the zenith of their power.
HEADLINE HOGS
Number of newspaper items that mention "private equity"
| The Globe and Mail | The Wall Street Journal (U.S. edition) | |
| 2001 | 95 | 344 |
| 2002 | 166 | 414 |
| 2003 | 247 | 479 |
| 2004 | 261 | 625 |
| 2005 | 420 | 1,089 |
| 2006 | 500 | 1,507 |
SOURCE: FACTIVA
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