Filed under: Raising money, Private equity industry, Public or private?
There’s been a lot of speak lately about whether the decline of the buyout boom will lead to a weakening of the public markets. The Wall Street Journal summed up the argument that it would pretty well:
For the past few years, private-equity firms have helped to lead the stock market higher by offering rich premiums for the shares of companies they were seeking to take private.
This important underpinning to the market might now be losing its power. As the cost of financing rises, private-equity firms will lower the price they are willing to pay — if they buy at all.
But the Financial Times ain’t buyin’ it:
Private Equity Intelligence provides an estimate for “dry powder” - committed equity as yet unspent - for buy-out funds. To this can be added the likely capital raised by private equity outfits on the road now to produce a total of $548bn… It is reasonable to assume that this money is spent on takeovers that are three-quarters debt-financed and occur at a one-third premium to the stock market price… On this basis the total LBO takeover premium due to be paid to stock market investors is $506bn. This is only 2 per cent of North American and European market capitalisation… if investors are accurately discounting the immediate pipeline of activity, anticipated LBO takeover premiums are not heavily distorting equity prices in aggregate.
To me, that’s actually pretty compelling evidence that a downturn would harm equity markets — If the “dry powder” dries, we would, based on the theory provided in the article, see a buyer of 2% of the U.S. and European market’s stock fall off the face of the earth. That’s the equivalent of 4 Berkshire Hathaway’s saying the heck with it.
We’ll see what happens, but I think a downturn in the private equity industry will have a materially adverse effect on the stock market’s performance.
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