Friday, April 24, 2009

Discounted Private Equity Stakes

Declining asset values is both a boon and a bust for private equity underwriters (PEU's). The Carlyle Group went from $91.1 billion under management to $85.5 billion with the stroke of a pen. Mubadala Development Co., a United Arab Emirates sovereign wealth fund, owns 7.5% of the declining PEU. Mubadala took a 40% accounting hit, writing down their investment in Carlyle by $543 million. While the UAE fund has deep pockets, other investors may not want to ride out the economic hurricane.

Goldman Sachs will take discounted private equity stakes off investor's hands. Goldman started a $5.5 billion fund to acquire PEU investments on the cheap.

Who might be dumping? AIG held investments in private equity. They're moving anything not nailed down. It's difficult to sling cash from a financial black hole.

Pension funds got capital calls from PEU's after Wall Street imploded. CALPERS and the New York State pension fund ponied up new money, but other pension funds may want out.

Ex-Wall Street investment banks, now commercial banks, played hard and fast in the PEU arena. Lehman Private Equity, with Jeb Bush as an adviser, landed on its feet post bankruptcy. Will bank stress tests require any "shiny new commercial banks" to raise capital? If so, will their PEU investments go on the block?

Carlyle co-founder David Rubenstein spoke at length on how PEU's can boom in the bust, other than buying back affiliate debt for pennies on the dollar and getting an Uncle Sam tax break to boot. Rubenstein emphasized the importance of government seeing private equity as part of the solution. Last week, David hosted White House Senior Economic Adviser Larry "Sleepy" Summers at the Economic Club of Washington. He spoke of Larry's strong tennis game.

This week Mr. Rubenstein gave an award to Treasury Chief Tim "Fiscal Hawk" Geithner. Tim dropped his fiscal dovishness under the tutelage of Peter G. Peterson, co-founder of The Blackstone Group, another PEU. The Obama administration clearly believes private equity is part of the solution. They avoided regulation at the G20 meeting and look to do likewise in the U.S. regulatory revamp.

The latest government goody could have PEU's owning larger chunks of commercial banks. Carlyle bid on BankUnited, a failed bank under the control of the FDIC. The bank regulator sold IndyMac to a consortium of hedge funds and PEU's.

Boon, bust? Stay tuned for more soaring rhetoric from President Obama. But my nose belies my ears. Something smells. It's PEU's corporafornicating on our tax money.