Private Equity Debt Bubble

"I think of this as a debt bubble, not a private equity bubble," Landry (AP note CEO of TA) says. "That's the horse, and we're the cart." Debt markets that finance private equity transactions have changed in three important ways. They are charging lower interest rates, reducing the premium normally charged for greater risk. They are lending more money for the purchase of an operating company, exceeding normal caps based on the cash generated by the acquired business. Finally, debt markets are reducing or virtually eliminating covenants and other rules that now make it almost impossible for private equity investors to default on loans used to buy companies.

Got that? Low rates, more leverage, practically no conditions. How do you think that story is going to end?

"The reality is the markets are willing to provide extraordinary amounts of debt, almost indiscriminately," says Scott Sperling , copresident of Thomas H. Lee Partners, the big Boston private equity firm. "It's hard to put these companies into default. I can't think of the last time we had a real covenant in one of our deals."

There is another issue beyond default of course. Exit valuations will go down if this type of financing goes away.

From the Boston Globe

Why You Are Not in Hedge Funds

From Andy Kessler

As heard on TV one morning while shaving:

Morning Show Talking Head: So tell us what drives hedge fund managers?

Hedge Fund Dude: It's just never ending. Thinking about what is going to work next. I have a friend who is worth $150 million who is working some new ideas for a fund.

Talking Head: If I had $150 million, the last thing I would do is start a hedge fund.

Hedge Fund Dude: That's why you don't have $150 million.

Early Days at Blackstone

As in all great entrepreneurial success stories, success requires a) facing a lot of rejection, b) hard work and perseverence and b) a bit of luck

Knowing that they needed to build revenues to add to their $400,000 seed capital before they could move into the emerging LBO activity, they started a mergers and acquisitions practice.

"I had a pretty good feel about how CEOs felt about investment bankers," recalls Mr Peterson, who had been both. Mr Schwarzman says: "We thought $400,000 was a bunch of money and we watched it like an hourglass. We lost half of it before we had our first dollar of revenue."

"Starting the private-equity business was even harder - oh my gosh, that was hard!" says Mr Schwarzman. "Our first 19 best prospects turned us down one after another; 488 potential investors turned us down. There were some crowning moments of embarrassment ... We were on the road for a long time and it was hard to be told 'no' by a lot of our friends."

Then came a breakthrough. "Garnett Keith (Prudential Insurance Company's vice-chairman) was eating a tuna salad sandwich. It was a Friday in Newark and I was not expecting success," says Mr Schwarzman. "He took a bite out of his sandwich and said, 'I will give you $100m'. I was shocked into silence: I was so grateful, so appreciative ... I knew others would follow."

They did. Blackstone's maiden fund won 32 investors. Even so, the pair came within "a whisker of failure", admits Mr Schwarzman. The fund closed days before the October 1987 stock market crash. "If we had not closed the fund, investors could have withdrawn support. It was either good luck or good timing."

Either way, Blackstone began making its private-equity investments when asset prices were suddenly depressed. Blackstone and other buy-out groups snared assets on the cheap. Their first deal involved USX, a steel and energy group that had been stricken by industrial action and was under attack by Carl Icahn, the corporate raider.

Full article in the Financial Times (subscription may be required)

Home sales: Worst drop in 18 years

Unlike "economists", our regular readers will not be surprised by this news. As is usually the case, conventional financial opinion is utterly incapable of predicting a shift in any asset class.

NEW YORK (CNNMoney.com) -- Existing home sales posted their sharpest drop in 18 years in March, a real estate group said Tuesday, as the latest reading on the troubled housing sector came in much weaker than economists had forecast.

Sales slowed to an annual pace of 6.12 million homes in March, according to the National Association of Realtors, down 8.4 percent from the 6.68 million rate in February. It was the biggest one-month drop since January 1989.

From CNN