The next hit to the economy could come from the debt used by private equity to buy ownership in companies. With cheap debt readily available from the banks, many large private equity firms used leverage as their main tool in their box to grow companies. What this meant was that private equity would put in 20% and use up to 80% of bank debt to build a massive war chest to grow a company's market share by acquisitions, not organic growth.
Do remember that the smaller funds were more into rolling up their sleeves and doing the sweat equity of sales and marketing to find customers and make them very happy, earning revenue and loyalty. Here is the rest of the story about the leverage kings of private equity:
The debt piled on companies amid the decade's $1 trillion buyout boom is coming due. The only question is about the extent of the fallout. The day of reckoning could simply be disruptive for the parties involved, or it could bring down the whole economy in much the same way bad mortgages broke confidence in the credit markets, effectively grinding them to a halt. Witness Hilton Worldwide, a portfolio company of Blackstone Group LP. Like almost every private-equity buyout, Blackstone acquired Hilton by putting down about 20% of the deal price. The rest was financed by borrowing, except Blackstone didn't assume the debt, Hilton did. Now Blackstone is in talks with Hilton's creditors to cut $5 billion from the $20 billion debt load carried by hotel and resort chain. Blackstone may pay down some of the debt at a discount in return for taking a bigger equity stake. (See WSJ story on Hilton.)
Jacoline Loewen, author of Money Magnet and partner in a private equity firm based in Toronto.
Free - win a valuable bonus gift with the purchase of just one copy of Growing Up, the new book by
There are ebooks, special reports audio downloads, workbooks, consultations, checklists, ecourses and more. Visit http://promo.alizabethcalder.com for immediate access.
Owners, CEO and Managers: In your business, do you:
It is time for your business to grow up. In the new book, Growing Up, by
A business doesn't grow up overnight. But Growing Up shows you how to get there as quickly as possible.
"From a technical perspective, the recession is very likely over at this point, but it's still going to feel like a very weak economy for some time." Ben Bernanke, September 2009
Green Shoots. What Green Shoots? Even Chairman Bernanke admits that signs that the North American economy has resumed growing are modest at best. In the US the bleak jobs picture shows that job hunters now outnumber openings six to one, the worst ratio since the government began tracking open positions.
A key feature of the Postwar North American economy has been the intimate relationship between credit growth and economic activity. It takes money to finance economic growth. Indeed, by late 2006 the available statistics showed that approximately six dollars of debt was needed to finance every one dollar expansion in the US GNP. The lesson is this: without growth in private sector credit demand, sustainable growth in the real economy cannot be maintained.
Read the Full Blog Here: www.recoverypartners.biz/blog
Office 416 644 1567
blog:www.recoverypartners.biz/blog
web: www.recoverypartners.biz
I recently had lunch with an expert in private equity who shared his helicopter view of the Canadian scene. He believes that we may be sitting calmly seeing the markets recover, but there are severe clouds on the horizon. Here are a few of his points - see if you agree:
