Power & Money Special Report
The House Financial Services Committee has been holding hearings on the impact of private equity – most recently, how it is affecting workers. As the wags say, if Congress is holding a hearing on a subject, it’s pretty much old news.
That may not be the case this time around. Private equity is reshaping the U.S. economy as well as its capital machetes; it is a force to be reckoned with and examined – which explains CNBC's day of special coverage May 17.
For several years now, private equity groups have been raising billions of dollars of cash to create buyout funds. And those funds have been busy putting the money to work. Cerberus Capital Management’s agreement to buy Chrysler for $7.4 billion is the latest – though hardly the largest – example of the buyout binge now under way. Last year was a record year for private equity M&A with some $410 billion worth of deals, and according to Standard & Poor's, there are now 12 private deals alone involving S&P 500 members.
By some measures, private equity is just getting started. The Blackstone Group plans to sell stock to the public through an IPO. That will open up private equity to a whole new group of investors as well as open the firm – and, by association, the industry – to greater scrutiny and, presumably, regulation.
Private equity has been around longer than people may think. Blackstone has been around since 1987 and has invested in some 100 companies through a $32 billion war chest. Kohlberg Kravis Roberts was founded in 1976 and through 2006 had completed 150 transactions. Its equity investments were valued at $74 billion, more than twice its invested capital.
The deals of the past, such as the infamous 1988 battle for RJR Nabisco won by KKR, were known as LBOs, leveraged buyout offers. Leverage is still a big part of the business; it’s just not advertised as such. There’s some concern that debt levels are too high and thus creating a bubble that awaits an inevitable bursting. Major players in the business have said as much, but the deal making wheels on.
All of this is just the backdrop for CNBC’s special coverage. You’ll hear Charles "Chip" Kaye, CEO of Warburg Pincus, which has assembled a $15 billion fund with eyes on China, as well as Mohamed El-Erian, Harvard University’s endowment manager.
You’ll also find out how the Ontario Teachers' Pension Plan has benefited from private equity, having been a direct investors in it for some 15 years, and what companies and sectors are next on private equity’s shopping list – which some say is already trending toward questionable deals.
Nevertheless, private equity has been good to its investors and principals, many of whom are now among the world's richest people.
Private equity, or, as we call it here, power and money.
The Deals: Too Much Of A Good Thing?
The private equity sector is striking increasingly larger deals, but is the race to capture cash and raise megafunds forcing firms to invest in questionable deals? Christian Oberbeck, managing director at Saratoga Partners, and John Adler, private equity director at the SEIU capital stewardship program, debate the issues on "Squawk Box".
Oberbeck says most of the deals make sense, but admits there's "always a lot of risks" in the private equity business. And even though we are in the late stage of both the economic and debt cycles, the cost of debt remains relatively cheap. "Very large, very attractive businesses are for sale," he adds.
Adler says that if you raise a mega funds you have to put the money to work and than can lead to deals with questionable financials (purchase prices multiples are higher than traditional levels. In some cases, Adler adds, given the amount of debt involve, there is "very little margin for error" if the business being acquired doesn't perform as well as expected or the economy falters.
Targets, Players, Investors
Companies In The Sights of PE
Given the acquisitive nature of private equity and the current M&A fever, you could say there's no shortage of targets and that almost any deal is imaginable. There was talk of a $100 billion one.
As Melissa Lee reports, two big investment banks following the PE game think that's a bit rich. Merrill Lynch says "the probability of such events occurring is less than generally thought." Morgan Stanley calls a deal of that size "heroic." To give you an idea of what kind of company a deal that size would involve, consider that Dow Chemical -- on one PE takeover target list --could fetch as much as $65 billion.
So what are the big targets these days? Watch the video to see which household companies are on the the lists of the two Wall Street firms.