PE Churn

I thought of subtitling this post "distressed was ALWAYS the place to be". I'm not sure what to make of this one, but that won't stop me from trying something.

You know, fundamentally, I like the private equity business model. (Maybe I should prepare a CV and apply for that PE job that keeps calling me.) However, if anything, I see more long range opportunity for the distressed guys, especially the hedge funds, in the aftermath of all of the credit expansion that has enabled this tear in the private equity business.

Starting with the absurdity of the "new" private equity model which seems to have little to do with restructuring, it occurs to me that the end game for many of these newly re-IPOed (LIPOed, in the parlance of Equity Private) firms will be a credit crunch, followed by a liquidity crisis and eventually bankruptcy and asset sales. Overexpansion always yields collapse, it seems. (Or so history appears to say.)

Maybe I have my order wrong. I'm no financial historian. But just as the housing market in the US made no sense, neither does the belief that these companies will magically work once they are again public. I mean, the didn't work before, and it appears that far too little changes inside many of these firms by the time they go public again. Its almost equivalent to broker account churning, right? Buy and sell the same battered assets over and over, never adding any real value. Hell, Blackstone has sold off a significant number of the EOP properties, and the deal only closed on the 9th of February. What's the point of doing the deal if you can't put something significant into the firm that wasn't there prior?

While on the face of things, it resembles the corporate raider mentality, it would be nice if these PE guys would at least admit that's the plan. Plunder and pillage, 21st century style.

This whole issue sounds very familiar to me, now that I think about it.

I don't know if this argument makes sense to anyone besides myself. I have been a bit sleep deprived recently. But watching all these deals close, while obvious benefiting the current shareholders, you just can see the ugly future approaching. Might as well be positioned to pick up the pieces, I figure. But that doesn't make it any less of a tragedy, or even simply a waste of investor capital. (Not that the investors mind, I'm sure, as long as they make their numbers. I'm looking at things from a big picture, compassionate capitalism kind of view. I think I'm the only person I know who embraces such a view.)

Can private equity (or capitalism for that matter) really be compassionate? Can it serve the interest of investors, of markets, of customers, and all the other stakeholders, and the Universe itself, while still being efficient, even ruthless when warranted? Or is it some fantasy I'm living in? I guess that's a discussion for another post.