Tuesday, September 16, 2008

It's a PEU Economy!

Guess who's making out like bandits while the average American struggles? Private equity underwriters (PEU's). First, Congress let them keep their preferred taxation on "carried interest". Now, the PEU boys are lined up to buy corporations on the cheap. But more opportunities abound, as they get to purchase their affiliates' debt at a significant dollar discount.

The Carlyle Group's distressed company fund is frothing at the mouth at opportunities. Their leaders believe things will get worse in our economy, before they get better. One manager said, "We are well positioned to make great investments."

Not long ago. Carlyle co-founder David Rubenstein bragged about buying back their debt on the cheap.

"The flavor of the day is buying your own debt at below face value. I'm buying bank debt in my deal with leverage from the bank that made me that deal"--David Rubenstein in Forbes, May 2008

It seems Kohlberg, Kravis, Roberts will get that same opportunity, given the fall of Lehman Brothers. Bloomberg reported:

Lehman Brothers Holdings Inc. is trying to sell $852 million of high-yield, high-risk loans, signaling it's dumping some assets after filing for bankruptcy, according to people familiar with the sale. Bids for the loans, some of which helped finance leveraged buyouts for First Data Corp. and TXU Corp., are due by 2 p.m. tomorrow in New York.

KKR owns all or part of both firms. How cheap can Henry Kravis buy back his own debt? Watch closely Jeb Bush, an advisor to Lehman's private equity division. You can see how the pro's work.

Now, how can the PEU's get those investment banks to lower their fees when they launch new IPO's?