The retail industry was a major target of private equity buyouts. Those deals came to an abrupt halt with the onset of the credit crisis. At least we haven't seen any $1 billion+ ones. There have been some smaller ones recently.
A big question that remains is whether a lot of the buyouts that did occur will end up working out. At least one, Wickes Furniture, proved to be a washout. The Financial Times, however, makes a pretty strong argument that the entire private equity model was a mirage. The buyouts added little to the acquired company. And now the party's over.
What do you think?
So now we know. The boom in private equity, which was promoted as the superior business model, based on patient capital, superior management and an alignment of interests, was nothing more than a trick of financial engineering – and a clumsy one at that. The magic of leverage works both ways, as we are discovering.
Henry Kravis of Kohlberg Kravis Roberts is asking his investors to be patient after a bout of negative returns and writedowns, echoing the cries of Alan Bond and other entrepreneurs of earlier credit cycles. Hamilton James, Blackstone's president, said at the Super Returns private equity conference on February 26: “We're a proxy for the credit markets.” David Rubenstein, co-founder of Carlyle Group, recently asked whether “modest return” was a more apt name for private equity. He thinks it's funny. It's not.
As investors are increasingly bruised by the recognition that reality has once again triumphed over hope, the private equity barons are having to confess that the benefits of superior management, alignment of interest and, of course, the superior reward structure counted for very little.