Friday, August 17, 2007

Doubling Down?

Wow. I have to admit that when I read a story like this, my appreciation grows for the legal crime that now seems to masquerade as private equity.

An issue that pops up for me is this - if a PE firm acquires debt in the secondary market from one of its own acquisitions, isn't this doubling down on what is a clearly a weak investment. I mean, the ratios to EBITDA that deals have been done for over the last 12 - 18 months have been sick. 9x EBITDA? WTF? How does this make sense to anyone. I haven't lived through that many complete market cycles and I can say that it doesn't even pass a sniff test to me. If returns are going to be weak (or even horrible) on the latest vintage of PE deals, and a firm goes in and acquires the leveraged loans of one of its targets on the secondary market, they would seem to be dooming the IRR on that deal in the long run. (Of course, that depends on how cheap the debt gets and how much equity they put up originally.)

Still, I like this strategy overall. Its smart, if not ingenious. It maintains the PE firm's control over the target. It saves face with the investors, if they even know what's going on.

Anyone carrying a gun to commit theft is a rank amateur!

Until next time...

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