Apollo Management acquired Realogy -- the parent company of real estate brokerages like Century 21 and Coldwell Banker -- at precisely the top of the real estate bubble.
So far the results have been about what you might expect. Now Apollo is pumping another $150 million in (subscription required) to keep the deal afloat through 2009. The company says that combined with the big cost cuts it's implemented over the past three years will be enough to save the company. Investors disagree, with some of the bonds trading for as little as 11.5 cents on the dollar suggesting a high probability of bankruptcy.
Like most other private equity firms, the Carlyle Group is in the process of cleaning things up. For example, the firm has taken write downs on funds, such as the Carlyle Partners IV platform. The fund was launched in the heyday of 2005, with $7.9 billion in assets.
But, at the same time, Carlyle is trying to find ways to capitalize on the low-valuation environment or even find growth opportunities. Just take a look at the latest fund: the Middle East and North Africa (MENA) fund, which has commitments of up to $500 million.
About 20 years ago, KKR fought hard to win the biggest buyout in history (at the time) – that is, the $25 billion purchase of RJR Nabisco. It was a crazy deal that ultimately turned into a best-selling book, Barbarians at the Gate: The Fall of RJR Nabisco. There was even an HBO movie about the antics.
Unfortunately, the RJR transaction turned out to be a dud. Actually, the company nearly went into bankruptcy. For the most part, the company had too much debt, which was a dangerous thing as the economy slowed down.
It was a tough lesson but KKR went on to post strong returns on subsequent deals. Right?
No surprise, the Blackstone Group LP (NYSE: BX) posted a horrible fourth quarter. The firm, which is massive private equity firm, suffered a loss of $827.1 million. Basically, the firm had to recognize that the values of its portfolio are shrinking. Oh, and there will be no cash distribution for the quarter.
Yet, Blackstone's stock spiked 25% to $4.87.
What's going on here? The firm's founder and Chairman, Stephen Schwarzman, was actually upbeat on the long-term prospects. As he scans across the wreckage across the global economy, he sees lots of compelling values.
And he should know. After all, Schwarzman has operated his firm since 1987 and has shown savvy when it comes to capitalizing on downturns (such as during the early 1990s).
To this end, Blackstone is focusing on distressed opportunities, especially through its GSO Capital Partners fund (which has experienced a nice pop in capital inflows). The firm is also putting together a new infrastructure fund (for about $2 billion).
Something else: Blackstone has a thriving corporate advisory business. Last year, the unit produced $411 million in revenues, up from $368 million in 2007.
However, Blackstone is also spending lots of time managing its current portfolio. This means cutting costs and developing innovative strategies to deal with the harsh economic environment. Bear in mind that within the portfolio, about 60% of the companies have no debt covenants and 90% of the debt maturities come due after 2012. What's more, 77% of the private portfolio companies had flat or higher earnings in 2008.
On the earnings conference call, Schwarzman emphasized that Blackstone is not like a typical financial services firm. For the most part, Blackstone is well-capitalized and has a strong investor base. Besides, the firm has the luxury to allow its investments to ripen as the economy eventually comes back.
In fact, he said that the negative talk about private equity is "complete garbage" and that Blackstone's current stock price is "dimwitted."
Now, isn't that the kind of fire you want to hear from a company's leader?
Who's going to pay for the massive budget deficits? Well, how about the rich folks?
This is certainly a theme in President Barack Obama's 2010 budget. Thus, if you are an alternative asset manager – that is, you operate a private equity firm or hedge fund -- then you may have to pay some big-time taxes. In fact, the bite could add up to $24 billion over the next nine years.
For the most part, alternative asset managers get their paydays from earning a percentage of the gains of their funds (usually, this is 20%). In the trade, this is known as the "carried interest." Interestingly enough, this is taxed as a capital gain, which has a preferential rate (15%).
However, with the Obama budget, the carried interest will be considered ordinary income – which, of course, has a much steeper marginal tax rate structure (39.6%). No doubt, this is bad news for firms like the Blackstone Group (NYSE: BX) and Fortress Investment Group (NYSE: FIG).
Although, the tax will not go into effect until 2011, assuming there is passage in Congress. In other words, there will be time to devise strategies with savvy tax attorneys. Or, if all else fails, alternative asset managers may just go offshore to seek out tax havens, which seems to be the typical approach.
It's a massive undertaking – that is, the liquidation of Lehman Brothers Holdings Inc. Over a hundred years, the company has assembled a wide assortment of global assets and investments. Although, as the firm tries to unload these – in a harsh environment – there are likely to be some lucky buyers.
And, according to a piece in the Wall Street Journal [a paid publication], it looks like Lehman is in the process of spinning off its VC arm, which has about $750 million in assets.
Interestingly enough, there will be a rebranding. The new name? It's going to be Tenaya Capital. Not really catchy, huh? But then again, that's usually the case for the VC world.
The existing partners of the fund will take over the operation. There is also participation from HarbourVestPartners.
And while there are no details on the terms, there's probably a significant discount. After all, the IPO and M&A markets are barren right now – so, it's going to take a while to get liquidity on the portfolio. And, Lehman realizes this. Apparently, the firm will get a percentage of the returns over time.
Of course, there is no shortage of toxic financial assets. They are clogging the financial system and putting incredible pressure on global banks.
Typically, such things get bought up. But, with little visibility and the complexity of modern financial instruments, it's been tough to attract bottom-fishers into the market.
Yet, according to U.S. Treasury Secretary Timothy Geithner, it's important that private operators swoop in.
In the world of private equity and M&A, Henry Silverman is a giant. And, at 68 years old, he's getting back into the game. That is, according to a report in the Wall Street Journal [a paid publication], he has joined Apollo Management as the chief operating officer.
With the credit crunch and terrible economy, Apollo has suffered a variety of setbacks over the past two years, such as the bankruptcy of Linens 'N Things and the legal battle over Huntsman (NYSE: HUN). So, the firm definitely needs a boost.
When talking to the founders of early-stage founders, I hear a common message: it's nearly impossible to raise venture capital. Basically, the VC world is in "hunkder-down" mode because of the slowing economy as well as the dearth of IPOs and M&A deals (there were only six VC-backed IPOs last year). True, VCs are supposed to take a long-term view – but human emotions usually dominate during times of uncertainty. Hey, just look at what happened during the dot-com bust.
Well, according to a piece in Bloomberg.com, it looks like VC firms are in the process of giving some grim advice to their portfolio companies. Just look at Redpoint Ventures, which invested in standout deals like MySpace.
The firm wants its companies to cut staff by as much as 10%. The main reason is that capital has dried up – so early-stage ventures need to find ways to stretch their dollars.
Besides headcount cuts, Redpoint wants to see restraint with budgets, such as with R&D and marketing. Instead, there must be a revenue justification for major expenses (and the revenue has to come fast).
It's tough stuff but necessary. Unfortunately, it will probably mean less innovation in the US economy. But, then again, this is what usually happens in a protracted recession.
Despite the recession and surging unemployment, there are actually some signs that the real estate market is perking up. True, this may be a statistical quirk – but it's encouraging.
But, there is one savvy investor who sees opportunity: Wilbur Ross. He's the financial backer of Home Mortgage Servicing Inc., which is now the #2 mortgage servicing company to third parties.
At the SuperReturn conference this week, some of the biggest players in private equity are giving their opinions on the market. For example, the Carlyle Group's David Rubenstein says there are some compelling values as in energy and even finance -- so long, of course, as the federal government is willing to pitch in some capital and provide a backstop.
However, don't expect the go-go days to come back any time soon. In fact, Rubenstein believes that the balance-of-power has shifted to major investors, such as pension funds and endowments. Essentially, they are going to require more discipline, transparency and lower fees. This is assuming that a private equity firm can raise any capital (it's likely that the 2006-2007 vintage funds will sustain losses for some time).
Not long ago, institutions and sovereign wealth funds salivated over the opportunity to invest in private equity operations. But, as seen by the lowly stock prices of the Blackstone Group LLP (NYSE: BX) and Fortress Investment Group (NYSE: FIG), things are much gloomier now.
Interestingly enough, TPG has spent some time trying to drum up interest in an equity stake. And, it looks like there were serious talks with the Kuwait Investment Authority, the California Public Employees' Retirement System and the California State Teachers' Retirement System. However, according to a report in the Financial Times, it appears that negotiations have ended.
Back in mid 2007, something unusual happened. That is, major private equity funds couldn't get funding for their deals. Yes, it was an ominous sign, which propelled the credit crunch and led to a grinding recession.
Now, the doom-and-gloom is fairly pervasive. In fact, there's talk that private equity is headed for a mega bust.
But, might this be an exaggeration? Well, this is the sentiment of one of the legends in private equity, KKR's Henry Kravis.
After all, private equity has survived some tough times, such as the early 1980s (the prime rate reached 21%, after all). Oh, and there was the S&L implosion during early 1990s.
Let's face it, private equity operators will find ways to pounce on opportunities, especially since there are compelling valuations in the marketplace. True, it might be tougher to get traditional bank loans. But, why not find alternative sources, such as sovereign wealth funds?
Or, another idea is to create new debt structures, which allow institutional investors to invest directly. In a way, this would represent a disintermediation of the banks.
However, the fact remains that the current downturn is severe – and global. Besides, the private equity industry binged on low-cost debt from 2002 to 2007. Thus, there will be a big focus on existing deals, which could take away attention from new transactions.
Finally, it's a good bet there will be increased regulation on private equity funds, which will likely stall things even more.
The buyout binge, which lasted until mid 2007, got its fuel from major banks. Of course, with the credit crunch, the spigot has closed shut, putting the ice on dealmaking.
But once the banking system comes back, will we also see a big comeback in private equity?
Actually, this may not be the case. President Barack Obama has wasted little time in taking the offensive against Wall Street fat cats. Of course, he put the kibosh on Citigroup's (NYSE: C) attempt to procure a $50 million plane. Obama also said it was "shameful" for Wall Street to dole out $18.4 billion in bonuses last year.
And, the fact remains that the federal government has massive equity stakes in the top banks in the US. In other words, it's a good bet that Obama's economic team will be fairly intrusive – and this could mean focusing on bread-and-butter business and consumer loans, not buyout deals.
Thus, expect a heap of new regulations, which will likely make it more difficult to extend risky loans. In fact, this will be the case in other countries, such as the UK, where there has been a massive government bailout of the financial services industry.
Consequently, it seems inevitable that there will be consolidation in the private equity space, through mergers and liquidations. At the same time, expect these firms to change their approaches. As seen with Blackstone (NYSE: BX), Carlyle and Apollo, private equity will probably move away from buyouts to investments in distressed debt, realizing that it will take a long time for dealmaking to make a comeback.
The share prices of private equity firms like Blackstone Group (NYSE: BX) and Fortress Investment Group (NYSE: FIG) tell the story; that is, Wall Street thinks the sector is virtually dead.
Well, it might be an exaggeration. In fact, there are actually some signs of life. Just look at Apollo Management LP. According to Reuters, the firm was able to pull off a miracle by raising a whopping $14.8 billion fund.
OK, with the credit crunch still in full force and the economy lagging, why are investors doing this? Aren't they already overloaded on alternative assets? Hey, when making money in this game, it's about finding an entry point in a down cycle.
Keep in mind that it took Apollo about 16 months to raise the fund. Along the way, the firm put the money to work, with the main focus on credit securities.
What's even more amazing is that -- during this period -- Apollo has suffered a variety of recent blow-ups, such as the botched deal for Huntsman (NYSE: HUN) and the bankruptcy of Linens 'n Things. Other deals, like Harrah's, look dicey.
Yet, the new Apollo fund is encouraging, indicating that private equity operators are willing to take risks, despite the pervasive doom and gloom.
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Apollo Management acquired Realogy -- the parent company of real estate brokerages like Century 21 and Coldwell Banker -- at precisely the top of the real estate bubble.
Like most other private equity firms, the 
About 20 years ago, 
. There was even an HBO movie about the antics. 
No surprise, the 
and 
. He is also the founder of 
It's a massive undertaking – that is, the liquidation of Lehman Brothers Holdings Inc. Over a hundred years, the company has assembled a wide assortment of global assets and investments. Although, as the firm tries to unload these – in a harsh environment – there are likely to be some lucky buyers.
Of course, there is no shortage of toxic financial assets. They are clogging the financial system and putting incredible pressure on global banks.
In the world of private equity and M&A, Henry Silverman is a giant. And, at 68 years old, he's getting back into the game. That is, according to a report in the 
When talking to the founders of early-stage founders, I hear a common message: it's nearly impossible to raise venture capital. Basically, the VC world is in "hunkder-down" mode because of the slowing economy as well as the dearth of IPOs and M&A deals (there were only six VC-backed IPOs last year). True, VCs are supposed to take a long-term view – but human emotions usually dominate during times of uncertainty. Hey, just look at what happened during the dot-com bust.
Despite the recession and surging unemployment, there are actually some signs that the real estate market is perking up. True, this may be a statistical quirk – but it's encouraging.
At the SuperReturn conference this week, some of the biggest players in private equity are giving their opinions on the market. For example, the Carlyle Group's David Rubenstein says there are some 
Not long ago, institutions and sovereign wealth funds salivated over the opportunity to invest in private equity operations. But, as seen by the lowly stock prices of the 
Back in mid 2007, something unusual happened. That is, major private equity funds couldn't get funding for their deals. Yes, it was an ominous sign, which propelled the credit crunch and led to a grinding recession.
The buyout binge, which lasted until mid 2007, got its fuel from major banks. Of course, with the credit crunch, the spigot has closed shut, putting the ice on dealmaking.
The share prices of private equity firms like 
