Goldman works on half of global buyouts
Goldman works on almost half of private-equity dealsSo far this year, Goldman Sachs has been involved in almost 50% of private-equity deals worldwide. The industry is on pace for a record year, with $483 billion worth of deals having been announced by the end of May. That's more than twice as much as last year at this time.
Goldman works on half of global buyoutsJames Mawson
04 Jun 2007
Goldman Sachs has worked on nearly half of all private equity deals around the world so far in 2007, in what is turning out to be a record year for the industry.
The combined value of buyouts in the first five months of this year has climbed to nearly $500bn (€372bn), according to data provider Dealogic, and Goldman has worked as an adviser or finance arranger on 50 deals worth a combined $226.5bn.
Goldman pushed JP Morgan and Citi into second and third place respectively, but was boosted by the firm advising its in-house private equity arm’s $87.7bn of deals. Based on an assumed 1% to 2% advisory and debt arrangement fee, Goldman Sachs could have earned $4bn in the first five months, if all announced deals are completed.
By the end of May, private equity firms had announced $483bn of deals, more than double the total by the same stage of 2006 and nearly 30 times the value a decade before.
A third of the year’s deals were announced last month, Dealogic said, including Goldman Sachs and TPG Capital’s agreed $25bn take-private of US telecoms company Alltel. However, Kohlberg Kravis Roberts has taken the top spot for financial sponsors having agreed $123bn of deals.
KKR’s global buyout total was nearly the same size as the entire value of announced deals in Europe, according to Dealogic, which was $734bn.
goldman sachs, private equity, investment banking, global marketsLabels: global markets, goldman sachs, investment banking, private equity
Battered home-loan industry gets boost from big investors
Battered home-loan industry gets boost from big investorsPrivate equity, hedge funds and investment banks are all jumping into the subprime-mortgage business, which has been plagued by decreased volume and rising defaults. "There is a lot of money pent up," said Steve Probst, national sales manager with Fairway Independent Mortgage. "And a lot of people are betting that the market will snap back quickly."
Big Investors Jumping Back Into Shaky Home LoansBy VIKAS BAJAJ and JULIE CRESWELL
The subprime mortgage business is in tatters: loan volume is plummeting, defaults are rising and some of the biggest lenders have cut back or shut down.
So what is the smart money — private equity, hedge funds and investment banks — doing? They are swooping in and taking over those battered businesses, seeing opportunity amid the wreckage.
“There is a lot of money pent up,” said Steve Probst, national sales manager with Fairway Independent Mortgage, a lender based in Sun Prairie, Wis. “And a lot of people are betting that the market will snap back quickly.”
It is a risky proposition.
In many parts of the country, there is a glut of unsold homes. Defaults and foreclosures are rising, putting further pressure on home prices and mortgage lending. Some housing industry officials worry that the new infusion of capital may refuel aggressive and risky lending to people with poor credit, known as subprime borrowers, delaying a much needed winnowing of the business.
Those dark clouds do not faze the new money in subprime. Among those making the biggest bets is Cerberus Capital Management, which first made its name investing in distressed debt. One of the country’s largest private equity firms, Cerberus has a record of making risky contrarian bets, including its recent agreement to take control of the troubled Chrysler Corporation for $7.4 billion.
Cerberus acquired control of the subprime lender Residential Capital last year, when it led an investment consortium that bought a 51 percent stake in G.M.A.C., the finance arm of General Motors. And in April, Cerberus, which also owns Aegis Mortgage, a subprime lender based in Houston, announced plans to acquire Option One, the troubled mortgage subsidiary of H&R Block.
Taken together, these acquisitions would make Cerberus the biggest subprime lender in the country, far ahead of large mortgage giants like Countrywide, Wells Fargo and others, according to first-quarter lending statistics from Inside Mortgage Finance.
It is unclear whether Cerberus will combine its mortgage operations into one company or operate them autonomously. Consolidating the businesses would offer streamlining and cost-cutting advantages, analysts say. Executives at Cerberus, which closely guards details about its strategy and investments, declined to be interviewed for this article and did not respond to written questions.
“They have certainly double-downed and have bought some extremely attractive operations — companies that have dominated their space,” said Brenda B. White, a managing director with Deloitte & Touche Corporate Finance. “But now they’re faced with executing on a plan, whatever that plan might be.”
This year, when rising mortgage defaults and a credit squeeze on Wall Street have forced many subprime mortgage companies into bankruptcy, some analysts predict that the industry might shrink by a third or more. Many industry officials acknowledged that a shakeout was necessary to cull the industry of the lenders that led in making risky loans and forcing rivals to match them or lose business.
In the last several months, however, private equity firms and others have acquired, taken stakes in or provided fresh capital to companies that wrote nearly 20 percent of last year’s $600 billion in subprime loans. It is, analysts and industry officials suggest, an unusually quick and substantial bet on a distressed business that by most indications is in the early phases of a long-term retrenchment.
With billions in capital available to them, investors like Cerberus, Ellington Capital and the Citadel Investment Group see an ideal buying opportunity. Yet trying to time the bottom of a sliding market has been tricky, even for smart-money investors like Cerberus. For instance, rising defaults and the cost of buying back poorly performing loans from investors left Residential Capital with more than $1.5 billion in losses in the six months that ended in March and the losses are expected to continue. (In March, General Motors, which still owns 49 percent of G.M.A.C., was forced to put an additional $1 billion into the unit because of the division’s mortgage woes.)
Cerberus has insisted on a number of terms and conditions in its deal to buy Option One, suggesting that the firm has become more vigilant about not paying too much. As announced, Cerberus agreed to pay slightly less than $1 billion, but the final amount could range from as little as $400 million to $800 million, depending on how well Option One’s business fares from now to the transaction’s closing in October, according to estimates prepared by Kelly Flynn, an analyst with UBS.
That is a far cry from the $1.3 billion H&R Block executives said earlier this year that they expected to get for the unit. H&R Block could get more money from Cerberus if Option One turns a profit within 18 months after the deal closes. Barrett Burns, who has run lending businesses for Citibank and Ford Credit, says that Cerberus and the other investors in the mortgage business are being far more prudent in their purchases than big Wall Street firms like Merrill Lynch and Morgan Stanley were when they paid hundreds of millions of dollars for subprime companies last year.
“The investment banks that were buying last year were buying at the high,” said Mr. Burns, who is now chief executive of Vantage Score, a company that provides credit scores that lenders use to evaluate borrowers.
(Both Merrill and Morgan have said they are comfortable with what they paid for their subprime acquisitions.)
Astute buyers, Mr. Burns noted, are picking up loan servicing businesses, which earn a predictable stream of fees for handling collections and dealing with defaults, and retail branch networks, which are difficult to build and tend to produce better-quality loans than wholesale channels like mortgage brokers.
Even so, industry officials say new entrants to the subprime business may be in for nasty surprises if they think the current difficult stretch represents a bottom. Making money in the business, they say, is difficult and getting harder.
Investors who buy subprime mortgages are demanding higher-quality loans after being burned by high rates of defaults and fraud in loans written during 2005 and 2006. That is forcing mortgage companies to tighten lending standards by demanding that borrowers make bigger down payments and have better credit histories, changes that have significantly reduced the pool of qualified borrowers.
“The reality is that the mortgage business for the foreseeable future is not a growth business,” said Jeffrey Kirsch, president of American Residential Equities, which buys defaulted mortgages. “So, it is surprising to see things frankly where they are.”
Mr. Kirsch and others say buyers like Cerberus will have to be willing to lose money and invest in the companies they are acquiring for some time before things pick up.
“They’re taking enormous risks here in hoping that they’ll be able to stabilize these businesses, keep them going, and get the types of regulatory approval they need to originate and service mortgages,” said Rick Antonoff, a partner in the bankruptcy and restructuring practice at the law firm of Pillsbury Winthrop Shaw Pittman. “They have put a lot of capital in already, and it’s going to take additional capital to keep these businesses going for a while.”
Those concerns are a major reason other subprime lenders have not succeeded at selling assets. New Century Financial, which was one of the biggest subprime lenders in the nation before it filed for bankruptcy protection in April, failed to attract bids for its loan origination unit in a bankruptcy auction because regulators in several states including California had restricted it from making more loans. (Cerberus had briefly considered acquiring New Century before it filed for bankruptcy, according to industry officials who asked not to be identified because they were not authorized to speak about the matter.)
In other instances, investors have put more capital into subprime after securing concessions that would have been unthinkable even six months ago.
In April, Accredited Home Lender, a San Diego-based lender, raised $230 million in loans from Farallon Capital, an investment firm based in San Francisco. The mortgage company agreed to pay a 13 percent interest rate and penalties if it sought to pay off the debt ahead of time. The company also gave Farallon warrants that would allow it to increase its stake in Accredited to 19 percent, from 7 percent. The warrants allow Farallon to buy the company’s shares for $10 apiece, a discount to the stock’s $13.99 closing price yesterday.
Another hedge fund, Second Curve Capital, that bought an 8.5 percent stake in Accredited in early February when the stock was trading at $25 to $30, has increased its stake in the company to 11.2 percent as the stock has fallen.
Citadel, an aspiring financial conglomerate based in Chicago, picked up the lending business of ResMae for just $22 million. Ellington Management, a hedge fund based in Greenwich, Conn., that specializes in mortgage-backed securities, has agreed to pay an undisclosed sum for the lending business of Fremont General, which has not made a subprime loan in almost three months and has cut 2,400 jobs in its lending business.
It is unclear how these investors will operate their new subprime businesses — most declined to discuss their plans or did not return calls for comment — but at least one mortgage company said it was concerned about lending standards weakening again.
“There is a lot of fear that expansion starts again because liquidity is coming in,” said Stephanie Christie, a senior vice president in charge of nonprime lending at Wells Fargo Home Mortgage. “The industry needs to be very serious about prudent underwriting and make sure we don’t go back to making bad loans.”
At the same time, however, analysts note that the new capital could help alleviate the credit squeeze many regulators and housing advocates feared would impede borrowers who want to buy homes or need to refinance out of onerous mortgages.
“No one wants to see subprime lending dry up altogether,” said Kathleen Shanley, an analyst with Gimme Credit, a research firm, “because of the potential implications for growth in the housing market and the hardship for existing borrowers who may need to refinance their loans.”
full articlemortgages, subprime, investment banking, private equityLabels: investment banking, mortgages, private equity, subprime
Congress could regulate private equity
Congress could regulate private equityUnions said pressure from Congress on private-equity funds could lead to higher pay and more benefits and could spur more unionization. In a May 16 hearing, House Financial Services Committee Chairman Barney Frank, D-Mass., said he was looking at unspecified legislation that would put tighter controls on the funds. "When a small number of individuals benefit from a particular deal in the tens and sometimes hundreds of millions of dollars, and concurrently, workers are laid off, we have a situation which [is] wrong," Frank said.
Congress hints at regulating private equityBy Sara Hansard
May 29, 2007
WASHINGTON — Unions are hoping that pressure from Congress on private-equity funds will lead to better pay and benefits for workers, including more unionization.
“We’re in the early stages of starting a national debate about income inequality in this country, and the special responsibility that private equity has [is] to address greater opportunity for workers in this country,” Stephen Lerner, assistant to the president of the Service Employees International Union in Washington, said in an interview last week. He is the director of the 1.8-million-member union’s private-equity campaign.
House Financial Services Committee Chairman Barney Frank, D-Mass., made clear at a hearing held by his committee May 16 that he is looking at unspecified legislation to regulate private-equity funds more stringently.
“When a small number of individuals benefit from a particular deal in the tens and sometimes hundreds of millions of dollars, and concurrently, workers are laid off, we have a situation which [is] wrong,” he said at the hearing, which dealt with private equity’s effects on workers and firms.
Mr. Frank cited as an example a news report that $19-an-hour union janitors at the Tommy Hilfiger Corp. recently were replaced with $8-an-hour non-union janitors as a consequence of the $1.6 billion buyout of the company last year by private-equity firm Apax Partners Inc.
Both companies are based in New York.
The laid-off workers later were rehired by a different contractor.
Company founder Tommy Hilfiger will receive at least $14 million a year through 2010 from the sale, “while workers in their 40s and 50s have been laid off with one day’s notice,” Mr. Frank said.
“If we have a situation in private equity where enormous values are created, and the workers are either no better off or worse off, then from the public-policy standpoint, that seems to me to be undesirable,” Mr. Frank said.
The committee is focusing on whether there is such a pattern and whether the government should do something about it, he said, adding: “It could have [an] effect on policies involving unionization [and] taxation.”
‘No specifics’
Committee spokesman Steve Adamske said in an interview that “there are no specifics” on what legislation the committee might consider.
But a Republican staff aide, who asked not to be identified, suggested that “one of the issues they might look at is disclosure,” specifically more disclosure required for investors by the Securities and Exchange Commission.
Congress also is looking at changing the way hedge fund and private-equity fund managers are taxed.
At a meeting with reporters in Washington this month, Senate Finance Committee Chairman Max Baucus, D-Mont., said that he and the committee’s ranking minority member, Sen. Charles Grassley, R-Iowa, are looking at such changes.
Blackstone not representative
“The fundamental question is the degree to which income gain is ordinary income or cap gains,” Mr. Baucus said.
The issue that members of the Senate committee are trying to determine, he said, is how performance fees charged by private-equity and hedge fund managers should be taxed.
Currently, they are taxed at lower capital gains rates.
Although large firms such as The Blackstone Group LP of New York have attracted much public attention, “they’re not representative of the typical private-equity firm,” Jeffrey Jay, the managing partner of Great Point Partners LLC of Greenwich, Conn., said in an interview.
“The typical private-equity firm is providing growth capital for businesses, not involved in massive cost-cutting and debt-pay-down-type strategies,” he said. Individual investors and advisers who work with high-net-worth clients and family offices have “always been meaningful players in private equity and venture capital,” Mr. Jay said.
The AFL-CIO in Washington recently asked the SEC to require Blackstone, a private-equity and hedge fund group, to register as a mutual fund in light of the company’s offering its shares as a publicly traded limited partnership. Blackstone’s offering is one of the first major public offerings by a private-equity and hedge fund firm, and the SEC is reviewing it.
“If Blackstone LP can avoid coverage under the Investment Company Act of 1940, it appears to us only a matter of time before other investment companies rely upon the devices used by Blackstone LP to avoid regulation under the act,” AFL-CIO secretary treasurer Richard Trunka wrote in a May 15 letter to Andrew “Buddy” Donohue, director of the SEC’s division of investment management, and John White, director of its division of corporation finance.
Although officials associated with private-equity management firms argue that most of their profits go to institutional investors such as mutual funds and public pension funds, as well as financial advisers who serve wealthy clients, some advisers say that such investments may not be appropriate for investment advisory firms.
“In many of these cases, [advisers who invest in private-equity funds] are breaching their fiduciary duty by using some of these funds, because they are so non-transparent,” said Charles Stanley, a certified financial planner and chartered financial consultant with Capital Financial Advisors LLC of San Diego.
“There’s no way of knowing really what it is that they are doing with clients’ money when they put it into some of these funds,” he said. “That’s very questionable activity to be doing as a fiduciary adviser.”
full articleprivate equity, american regulations, congress, secLabels: american regulations, congress, private equity, SEC
How to handle the MA boom
How to handle the M&A boomBy Mohamed El-Erian
The boom in mergers and acquisitions has underscored the disparity between rising market values and serious economic concerns, writes Harvard Management Company President Mohamed El-Erian in this Financial Times commentary. Meanwhile, equity investors are enjoying benefits as investors looking for markets to "revert to the mean" have been stymied.
The mergers and acquisitions boom rolls on, slowly but surely changing the financial and corporate landscape. Spurred on by a record surge in private equity flows and enormously accommodating debt markets, the momentum of this shift is showing little sign of fading.
The impact is being felt across markets, particularly in the US where several indices have reached record levels.
But the M&A boom has helped to accentuate the contrast between buoyant market valuations and concerns about a US economy facing headwinds on account of a difficult housing market, a subprime mortgage debacle, high energy prices and large consumer debt.
The joy of equity investors, especially leveraged ones, also contrasts vividly with the frustration of others. Investors betting on continued historical aberrations in market trends have continued to benefit so far. In contrast, those looking for markets to "revert to the mean" have been left frustrated.
The latter have continued to observe stark historical inconsistencies in market valuations, volatilities, correlations and liquidity. Yet their attempt to exploit these inconsistencies has been repeatedly disturbed by yet greater market aberrations. The "Theory of Second Best", which dates back to the 1956 work of two economists Kelvin Lancaster and Richard Lipsey, provides a useful framework for thinking about all this.
Essentially, this theory looks at what happens when, in certain circumstances, one of the optimal conditions of a model is not fully met. Intuitively, when this happens, it might be supposed that the second-best solution involves continuing to meet the other optimal conditions of the model. The Theory of Second Best cautions against this. Instead, it suggests that a better outcome may involve deviating from these conditions.
When applied to today's financial markets, the second best theory illustrates one of the ways in which investors have had to adjust their approach to take into account the manner in which emerging economies are allocating their large and increasing reserves.
These economies' large "non-commercial" purchases of US fixed income products have introduced and sustained significant pricing distortions. And, as the Theory of Second Best suggests, the next-best solution for investors has implied betting on additional historical anomalies in other markets.
How has this worked? Large foreign purchases of US bonds have led to an unusual compression in bond yields and credit spreads. The resulting misalignment versus the equity risk premium has encouraged increasingly large leveraged buy-out activities which, in turn, attract even more capital to private equity.
No wonder M&A activity has surged. And, as the corporate landscape changes, companies with large cash holdings have been forced in, with some playing defence and others offence.
How long can this go on? For a while; but not forever. In the short term, the phenomenon has significant momentum that can only be derailed by a series of economic and technical dislocations. A single dislocation will not suffice as illustrated by the temporary setbacks of May-June 2006 and February 2007.
Over the longer term, valuations will be excessively divorced from the underlying economic realities, especially if the US economic slowdown intensifies. In addition, the risk of regulatory and political backlash will rise. Finally, the distortion that lies at the heart of it all – the non-commercial allocation of sovereign wealth funds – will slowly fade as emerging economies face pressure to increase the rate of return on their reserves and to allocate more funds to domestic uses.
Therefore, the basic challenge for investors is an outlook that is inherently fluid and potentially dualistic. The solution may well have three principal components: a strategic asset allocation that emphasises secular themes and a long-term destination; portfolio overlays that recognise the reality of an historically unusual journey; and a risk management process that is sensitive to the nature and evolution of the underlying market distortions.
Mohamed El-Erian is president and chief executive of Harvard Management Company.mergers, acquisitions, M&A, investment banking, private equityLabels: acquisitions, investment banking, MA, mergers, private equity
State pension funds explore infrastructure investments
N.J. pension fund explores massive infrastructure investmentUS pension fund explores $2bn infrastructure investmentStephanie Baum
New Jersey is exploring whether to make infrastructure investments as a hedge against inflation to boost its $81.2bn (€60.4bn) pension fund.
Strategic Investment Solutions, a California-based consultancy, advised New Jersey's investment council to put up to $2bn in infrastructure assets.
Mark Perkiss, a treasury spokesman, said New Jersey has not yet made a decision on specific infrastructure investments, but the pension fund is likely to put the money into private equity funds and could include global infrastructure assets such as toll roads and airports.
New Jersey currently owns 32 million shares valued at $190m in private equity infrastructure firms Cintra and Macquarie Infrastructure Group. These companies own a 75-year lease for Indiana’s toll road which they purchased last year for $3.8bn. They also own a 99-year lease for the Chicago Skyway, an eight mile toll road valued at $1.8bn.
New Jersey Governor Jon Corzine has repeatedly urged state representatives to explore leasing or selling the state’s own infrastructure assets such as the Atlantic City Expressway and the state lottery to reduce its debt burden.
Earlier this year an actuarial assessment revealed a $26bn shortfall in the pension fund.
Separately, Pennsylvania is considering a recommendation from Morgan Stanley to lease the state’s toll road. Morgan Stanley's analysis estimated the Pennsylvania Turnpike lease could be worth up to $3.6bn for a 30-year lease and up to $20bn for a 99-year lease.
Full articleurban development, private equity, infrastructure, investmentLabels: infrastructure, investment, private equity, urban development
Investment bank buyouts in private equity arena
Investment banks making their own decisionsInvestment banks aren't just advising and arranging the financing for private-equity buyers anymore. Today, many of these banks are working on deals for themselves alone.
Investment bank buyouts multiplyPromise of big profits is trumping potential for conflicts and losses
By Alistair Barr, MarketWatch
Instead of just advising on and arranging financing for private-equity buyouts, investment banks are increasingly doing the deals for themselves. In just one of the latest notable examples, Goldman Sachs (GS) on Monday joined with TPG Capital in an agreement to buy Alltel Corp., the nation's fifth-largest wireless-phone service carrier, for $27.5 billion in what would be the largest leveraged buyout ever in the U.S. telecommunications industry.
At the same time, Merrill Lynch (MER) took another step into the private-equity business too, when it bought a minority stake in GSO Capital Partners, an $8 billion hedge fund firm that helps private-equity companies finance deals.
The moves give Goldman and Merrill the chance to make much more money. But they also expose them to potential client conflicts and investment losses.
"The history of private equity at brokerage firms has been an on-again, off-again love affair," said Brad Hintz, an analyst at Bernstein Research and a former chief financial officer at Lehman Brothers.
During the 1980s boom in leveraged buyouts, major investment banks piled into acquisitions of their own, only to step back in the 1990s as they found themselves in conflict with their clients. It was for that reason, Hintz said, that Merrill dropped out of the business.
After the technology market blew up in 2001, brokerage firms saw a sharp retreat in earnings because they'd made private equity investments in tech companies. But since then, low interest rates and rising cash on corporate balance sheets has sparked an unprecedented private-equity boom that's made it difficult for investment banks to merely watch from the sidelines.
Top advisory candidateOne of the most alluring aspects of the business for firms like Goldman is that an in-house private-equity unit promises to boost investment banking revenue down the road. By taking an equity position, the bank instantly becomes the company's top candidate to become its adviser on any future underwriting or merger-advisory work in the future -- even though a competing brokerage might charge lower fees.
By Hintz's estimate, an investment bank gets a return of 40 cents in banking fees for every $1 it puts into a private-equity deal.
Here's how it works: Imagine you're chief executive of an industrial company that's just been acquired by Goldman Sachs's private-equity unit. They now own your company.
New regulations are also encouraging investment banks to put more of their own money into buyouts.
The upcoming Basel II accord requires less capital to be set aside to support private-equity investments. That is allowing banks like Goldman and Merrill to hold more private-equity investments on their balance sheets, Hintz explained.
The success of Goldman's private-equity unit also shows how profitable these businesses can be for Wall Street banks. The company has invested in more than 500 companies and more than $19 billion in capital has been committed to its buyout business since it began in 1983, according to Bernstein research.
In 2005, Goldman raised $8.5 billion for a private-equity fund, which at the time was the most money ever committed to a buyout fund. Several other private-equity firms have since topped that, but the fund remains among the 10 largest, according to Thomson Financial data.
Roughly one-quarter of the money came from Goldman and its employees.
Goldman's private-equity assets under management probably stood at roughly $19 billion at the end of 2005 and the bank generated management fees of about $220 million to $225 million that year, according to a Bernstein report in May 2006.
'Override' feeWith its buyout funds, Goldman tries to generate an internal rate of return of between 25% and 35%. In addition to investment returns and management fees, Goldman also collects an "override" fee, which is 20% of net gains when returns for the funds' outside investors rise above about 8% a year, Hintz said.
If Goldman manages to collect this 20% fee, further gains are shared, with 80% going to outside investors and 20% to Goldman, the analyst added.
"It's a high-return business," Hintz said. "Some are gold mines. Goldman is the expert at coining money from these businesses."
Other private-equity fees are charged too. Companies owned by private-equity firms usually pay a management fee of around 0.5% of annual revenue. Then there are advisory fees from the acquisition, bank syndication fees when companies' loans are refinanced, and sale or merger fees when the buyout firm unwinds its investment, Hintz said.
In 2005, Goldman's private-equity business probably had a pretax profit margin of 50%, Bernstein estimates. That's higher than its overall profit margin, which stood at 33% in 2005. The unit accounted for 5.3% of the bank's revenue and 8.2% of profit in 2005.
Losses, conflictsBut buyouts can produce investment losses too. From 2000 to 2002, Goldman's private-equity investments fell by 65%, Bernstein said, although the research firm noted that this was partly because the bank exited some holdings.
When an investment bank builds a big private-equity business, its risks conflict\ with other major private-equity players.
Goldman missed out on being named one of the underwriters for the upcoming initial public offering of Blackstone Group, one of the largest private-equity firms in the world. Bernstein's Hintz said that's a good example of how investment banks can end up competing against potential clients when they develop their own large private-equity businesses. "Private-equity firms are major, major clients of Wall Street and many brokerage firms are reluctant to compete with clients," he said, while noting that "Goldman has certainly been able to walk that fine line."
As these deals proliferate, they also have aroused controversy because they increase the likelihood that the firm would become both an adviser a potential bidder for a company that is up for sale.
Merrill Lynch, which has the second-largest private equity portfolio of any U.S. investment bank behind Goldman, often forms partnerships with other buyout firms. That reduces the potential for competitive conflicts but also cuts the fees and ultimate profitability of its business, Hintz said.
Still, buyouts were a big contributor to Merrill's earnings in 2006. Bernstein estimates that the business contributed 5% to 6% of the firm's revenue and more than 15% of its profit last year
Full articleprivate equity, leveraged buyout, leveraged finance, invesment banking,Labels: invesment banking, leveraged buyout, leveraged finance, private equity
Chrysler Sale May Accelerate Dealership Closings
Chrysler Sale May Accelerate Dealership ClosingsDetroit's Big Three automakers have too many dealers for the number of cars they sell. Many of those dealers are hurting financially, and struggling dealers aren't in Detroit's best interest.
Automakers are now trying to thin their dealer ranks. Chrysler, for example, has cut the number of dealers by about 10 percent in the last four years, to about 3,700, and says it will eliminate hundreds more.
The news that the private equity firm Cerberus Capital Management is slated to acquire Chrysler has prompted some industry watchers to predict that many more dealers will be put on the chopping block.
On a recent afternoon, Bill Tapscott, the impeccably dressed general manager of Lithia Chrysler in Renton, Wash., showed off his new vehicles, including the Aspen, a seven- passenger luxury SUV. He has been selling Chrysler cars and trucks for nearly three decades.
His dealership is what Chrysler calls an alpha dealer. It sells the full line of the company's products: Chrysler, Dodge and Jeep all under one roof . This spacious, modern dealership is the wave of the future for Chrysler dealers. The automaker wants its dealers to have larger geographic territories, a broader customer base, and less competition with others selling the same brand. The aim: More sales and higher profits.
"Chrysler wants its dealers to be profitable," says David Cole of the independent Center for Automotive Research. Profitable dealers spend more on advertising, they invest in new facilities, and they provide the kind of atmosphere people are looking for as they shop for new cars, he says.
In short, says Cole, "dealers are the public face of an automaker." Those that make hefty profits project the image of a vibrant car company, selling autos you want to buy. Since dealers actually purchase their inventory from Chrysler, the faster dealers reorder, the better it is for Chrysler's bottom line. But right now there are too many cars sitting unsold on dealer lots.
Earlier this year the company announced plans to eliminate about 10 to 15 percent of its dealers over the next year or two. Chrysler spokesman Jason Vines says that plan has been endorsed by Cerberus and by the Chrysler dealers. But he acknowledges that dealer support is tempered.
"Everyone is favor of this. But like the old saying, 'Everyone wants to go to heaven but no one wants to die.' "
In other words, the dealers are interested in having fewer dealers so long as they aren't the one getting axed.
Vines adds that, for now, there are no plans to go beyond the previously announced cuts. But he concedes that could change.
"If other opportunities come about and it makes sense, sure we will do that," Vines says.
Indeed, some industry watchers, including Cole, suggest that Chrysler needs to eliminate 1,000 more dealers as part of its long-term strategy. Cole says the buyouts will be expensive. "It's probably going to cost hundreds of millions, maybe even a billion dollars to get the kind of dealer body they have to have."
Dealers have franchise agreements with Chrysler – and if Chrysler wants to terminate those arrangements, it will have to buy the dealers out. That's what General Motors did when it eliminated the Oldsmobile nameplate. GM won't say what that buyout cost, but some estimates put that figure at more than $800,000 per dealer.
Full Article and blogauto industry, private equity, LBO, leveraged buyoutLabels: auto industry, LBO, leveraged buyout, private equity
Private Equity's New Entrepreneurs
Private Equity's New EntrepreneursThey run their own firms, seek out smaller deals that don't generate headlines—and make returns that are on par with the big boys
Read moreprivate equity, finance, leveraged finance, LBO, investment banking, careers
Labels: careers, finance, investment banking, LBO, leveraged finance, private equity
Providence Equity's CEO tackles "myths" of private equity
Providence Equity's CEO tackles "myths" of private equity: Jonathan Nelson, chief executive officer of Providence Equity, set out recently to discredit what he says are "myths" about the private-equity business. Among these alleged falsehoods: Private equity is private, and the private-equity bubble is about to burst.
full storyprivate equity, investment banking, underwriting, M&A, mergersLabels: investment banking, MA, mergers, private equity, underwriting
New MBA grads flock to private equity
With MBAs in hand, new grads flock to private equityWant one of those jobs in private equity where the average compensation for even the rookie players averages $289,000 a year? You're not alone. Newly minted MBAs prefer private equity gigs to working in the traditional home of big salaries -- investment banking.
full storygrad school, graduate, MBA, private equity, careers, jobsLabels: careers, grad school, graduate, jobs, MBA, private equity
