Saturday, January 6, 2018

PEU Good Times Roll

Reuters reported:

The global private equity industry raised a record $453 billion from investors in 2017, leaving it with more than $1 trillion to pour into companies and new business ventures, data from industry tracker Preqin showed on Thursday. 
Private equity underwriters (PEU) had their best fundraising year since 2007 when the greed and leverage boys raised $414 billion.  That year saw PEUs doing club deals to reduce bidding and using risky debt to buyout companies.

In July 2007 CNN Money reported:

Investors are starting to shy away from risky debt, raising worries that some of the biggest deals will have trouble securing financing. Congress is muscling ahead with tax rules on private equity, and interest rates are ticking higher around the world.
Congress never muscled private equity in 2007.  Instead the House and Senate catered to billionaire PEU founders after they descended on Capital Hill.  In 2010 Carlyle Group co-founder David Rubenstein was reported to say at the Washington Economic Club, when Congress took another run at eliminating preferred PEU taxation:

“That was a senator. That one call just saved us on carried interest.”
Back to summer 2007, when comments included:

But while market conditions are starting to wobble, activity has not waned. "The bubble isn't bursting, a little air is just being taken out of an inflated balloon." 

Some expect the turbulence in the credit market to be short lived. "There's growing risk aversion and the market is going through a reality check. But there don't seem to be any major cracks in the system and the markets aren't dramatically different than they were a few weeks ago."  
Carlyle Capital Corporation's balloon burst in March 2008, when it declared bankruptcy.  It was a harbinger of the much wider economic crisis that bomb cycloned in September 2008.

2018 finds Morgan Stanley Wealth Management exited its corporate junk bond position, the very debt PEUs use to fund buyouts.

Credit crisis explode when the big money boys no longer trust one another to make good on their debt.  If history is a guide such a crisis could occur within a year to fifteen months.

Update 1-6-18:  ZeroHedge report stock allocations are approaching Dot Com levels