Saturday, April 16, 2011

PEGCC Says No PEU Systemic Risk

The Private Equity Growth Capital Council (PEGCC) told the SEC that private equity underwriters (PEU's) pose no systemic risk.

The meltdown in September 2008 sent financial institutions into sheer panic.  Rich people no longer trusted their peers to make good on debts.  The inability to meet capital calls sent storied institutions into bankruptcy. Lending dried up, requiring Uncle Sam and the Fed to backstop the system with trillions ($) in interventions.

The Carlyle Group played a direct role in the meltdown.  PEU's drank the same euphoric spirits as Wall Street, believing asset prices would never come down in an environment of permanently cheap, unencumbered debt.  The hangover hurt like hell.

Carlyle Capital Corporation (CCC), a mortgage backed security fund levered 40 times, imploded in March 2008 after failing to meet over $400 million in capital calls.  The Carlyle Group welshed on lenders, leaving rich investors with an empty CCC bag.  It's a good thing investor CalPERS didn't behave like puffy Carlyle.  The California pension made good on Carlyle's $681 million in capital calls.

PEGCC stated in their news release:

"Private equity firms should not be singled out among all shareholders of businesses in the United States to be subject to report on their borrowing decisions."  

Just a rag tag group of corporate shareholders? Hardly. PEU's hate sunshine.  One might expect incomparable, great businessmen to handle simple sharing of information, especially one with a compliance solutions affiliate.  PEU's play by their rules, which Congress is kind enough to write into law.

PEU's may have a way to keep from losing companies completely to debt holders, contingent capital.  It automatically delevers a company based on certain triggers.  Congress gave a year to study PEU's and contingent capital.  What will they learn that they don't already know?