Two themes we expect to see emerging from private equity land in 2009 are continued bankruptcies of debt-laden portfolio companies, which in 2008 stands at 40 major bankruptcies and counting, and dramatic moves from these private equity owners to stave off bankruptcy. These drastic operational moves will also have many unintended consesquences as highlighted in a Bloomberg article this morning, entitled: "Feinberg Despised in Wisconsin Where Cerberus Lives Up to Name."
Feinberg's Cerebrus Capital Management owns NewPage Corporation, which recently closed a paper mill in Kimberly, Wisconsin, to ostenibly cut over head at the parent company. As a result of the closure, more than 600 jobs were lost in a town of 6,200 people. While outrage at private equity firms for downsizing is certainly not new, the comments aimed at Feinberg are particularly venomous and include, "This is a . .. extremely greedy guy who doesn't care about other human beings . . . he sold his soul to the devil . . . Feinberg has no morals."
Situations similar to this one in Kimberly, Wisconsin will only accelerate in 2009 and with them negative sentiment towards private equity firms. As this sentiment grows, Obama's ability to pass a bill forcing private equity executives to pay capital gains taxes of 35%, up from 15%, will be made easier. With continued failed deals and the outlook for lowered future compensation, the next few years are shaping up to be challening ones for the private equity world.
In addition to the points outlined above, leverage will be much less readily available for traditional leverage buyouts in 2009 than it has been in the past as investors in private equity deal debt, and investment banks that were left holding the debt, have suffered severe losses. As a result, these lenders will not be opening up their balance sheets and the credit markets for LBOs will be closed for the forseeable future, except on a very limited basis.
While it seems like Henry Kravis proclaiming that we were entering the golden age of private equity was just yesterday, and it was less than 18 months ago, that proclamation along with IPO of Blackstone marked the peak of the private equity business. In the traditional levered return sense, the priave equity business will be dead for quite some time. In its place, we will likely see an increased amount of strategic M&A. On the margin, credit markets continue to thaw, and valuations in some sectors have reached compelling levels.
In an environment where access to LBO capital tightens, and the cost of it begins to rise (over the long term; that’s what rates do after they go to zero), those liquid long cash become kings of The New Reality.