Play off of private equity

[1 Gunner]

I continue to see projections that estimate that 2006 will be a record year for fund raising for the various types of private equity firms. This year is on track to beat 2000 for capital raised. One estimate was $139 billion was raised in 2005 across the various fund types. The sizes of funds are getting bigger with the largest so far in 2006 being $14.2 billion.

So the question that ran through my head was how can the little guy (me) profit from this?

The one extension I could come up with would be investments into various investment banks that will continue to profit from:
- M&A activities of these funds,
- Exit events through trade sales to strategic buyers, and
- Increased activity in the IPO market.

The other extension are the various exchanges that will eventually profit from listing fees as these private equity firms take these companies public.

What are your thoughts on this?

The profits of most of the big players (Lehman, Goldman, ect.) are impacted by I-banking activities, but are influenced by so many other profit centers. Is their a pure play on I-bankers? Are their any smaller, publicly traded I-banks?

 

[exemplaria]

How to make a small fortune in private equity:

Start with a large fortune.

 

[darkstar]

"How to make a small fortune in private equity:
Start with a large fortune."

I've always heard that used with vineyards/wine.

"how can the little guy (me) profit from this?"
Invest in investment banks
Invest in potential LBO/takeover target companies
Invest in publicly traded VC/PE/Business Development companies (3i, etc)

Smaller, publicly traded IBs:
Lazard
Thomas Weisel
Evercore
Greenhill

The smaller banks tend to be a bit more focused on corporate advisory work and less so on sales/trading/research, so they're probably a better pure play on corporate advisory/M&A/IPOs than the likes of Lehman, GS, ML, MS, etc.

"The other extension are the various exchanges that will eventually profit from listing fees as these private equity firms take these companies public."
Not to mention that there is a lot of M&A activity in this sector at the moment.

 

[tobias]

Gunner, one thing to think about with all that capital pouring into private equity firms, they will have to deploy it. Since legitimate private companies with real prospects are quite limited and there are no where near enough places for PE firms to invest, these firms have taken up plan B.

Plan B involves buying underperforming public companies, cleaning house, levering them up and foisting them back onto a market greedy for IPOs. It is remarkable how many times these guys can pull this trick.

If you want to profit from this trend, look for public companies that would be considered deep value plays. Generally, these are old economy businesses trading at very low P/E multiples with massive free cash flow, low debt to equity ratios and limited growth prospects. Of course, the problem with buying these types of names is that you are basically praying for a buyout and if it never comes you are going down with the ship. I personally would never pursue this strategy, but hey - you asked, so I thought I would lend an opinion.

 

[wegowayback]

big private equity is turning into a joke...nothing more than a scam. KKR just raised something like $15b for their latest fund and blackstone raised about $14b earlier this year. there just arent that many good opportunities out there on this scale. good thing they figured out a near risk-free way around it...now all they do is the same old formula. after taking the company private, you pay yourself with a massive cash dividend and saddle the company with hoards of debt. you automatically recoup your investment (and then some), you sell the now debt-bloated company to the public and let the new public shareholders watch their earnings/cash flow get whittled away from servicing the debt. congrats, you effectively just stole $X amount

i always knew these unjustified dividends happened sometimes, but it was until the burger king IPO a few months ago that i realized just how slimy it was. even the WSJ finally had an article about it a couple weeks ago

btw, share performance of pe LBO companies taken public has absolutely SUCKED in the last year or two. moral of the story: stay away from private equity

 

[bbriscoe]

wego - How can they be stealing from future shareholders? the IPO buyers have the choice of whether to buy the stock or not - and can ascertain the debt structure from the prospectus. I think who is really taking all the risk here is the banks/bondholders who are allowing the company to be leveraged to the hilt.

 

[wegowayback]

there's always buyers. i mean, these companies arent necessarily broken, but the PE shops leave them in just good enough shape so that they can IPO it without much hassle. cops have what they call a JDLR - just dont look right. this is that kind of situation.

you're right about the banks and IPO buyers though...these people should be wary about situations like this. but again, there's always buyers

 

[bbriscoe]

Still there is some value added by the PE takeover usually. Deadweight is cut, efficiency is increased, and equity is freed up for other uses. Usually management is replaced as well. A no growth small company with entreched (family run) managment often faces high interest rates and high risk. The size of the PE firms can obtain debt at lower rates making leverage more feasible than it was under previous management.

And yes you can buy firms that are takeover candidates. Two I have owned recently until takeovers were MUSA and PETC. (Metals USA and Petco). Often the stock price will sag just before the takeover is announced. I think it is the bargain that catches the acquirer's attention and gets them to pull the trigger - and gets the board to agree to the sale.