While I was researching for my previous post, Were Private Equity Deals Overpriced? I typed “Private Equity” into the search tool (left margin at the bottom) and read through all my previous comments on the subject. There’s a bunch of good stuff in there if you are interested in looking back. But this one really stood out and I wanted to repeat it in its entirety. Note that I wrote this in mid-January when it wasn’t so nice to question Private Equity deals or LBO financing. Here’s what I wrote back then in a post called:

Barbarians at the Turnstile

Private Equity this, Private Equity that…it’s a slow news day in the markets unless we can overload it with talk about firms like Carlyle, Blackstone, Bain, KKR, et al. I think every angle has been covered to the point of overkill about the equity side of these transactions. But one thing that I want to see a show or print story on is the debt side of the buyout mania. After all, access to cheap debt is the fuel that is feeding this fire. You can talk all you want about the hundreds of billions in cash that has been raised by Private Equity firms but since many of these deals rely upon loading the company with debt at 3-to-1 ratios, I want to hear about the lenders. So I am challenging the tv and print guys that read my stuff to do this part of the story some justice. I don’t want to see another puff piece about how wonderful these deals are for the market. I want to hear some tough questions about the exposure of banks, pension funds, insurance companies, state agencies, etc. that are holding this paper. Are underwriting standards being maintained or is the money too easy? What are the yields, maturities, covenants, and other terms of financing the debt? What are the risks associated with rising interest rates? When and if these companies start to have difficulty meeting their debt obligations, I expect there will be a lot of whining from the same crowd that is desperate to get in on the action today. After the LBO craze of the 80’s, it was real easy to blame things on Milken and the barbarians at the gate. But unlike a gate which opens and closes, this story is more like a turnstile… it just keeps coming around. Hopefully we are getting it right and it will be different this time!