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Thread: weekend commentary - 'Private Equity' yields private equity market only for the rich

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    Default weekend commentary - 'Private Equity' yields private equity market only for the rich

    "NEW YORK -- Top IPO underwriter Goldman Sachs Group Inc. this week launched a platform allowing an exclusive club of big investors to trade unregistered, privately placed securities, in the latest challenge to U.S. equity markets.

    Private placements have become a big deal on Wall Street, another alternative for companies who want to raise capital but don't want the regulatory and disclosure requirements that come with a public listing.

    Goldman on Monday helped underwrite the private sale of 15 percent of hedge fund manager Oaktree Capital Management for $880 million. As part of that sale, Oaktree told investors they would be able to buy and sell Oaktree shares through the new Goldman Sachs Tradable Unregistered Equity system, or GSTRuE."(snip)

    (snip)"Last year, according to Nasdaq, $162 billion of capital was raised through unregistered private placements compared with $154 billion through IPOs, which are registered with the Securities and Exchange Commission.

    Goldman declined to comment on Oaktree or offer detail about its plans for GSTRuE.

    "Today we'll see how the system works and then as it evolves, as it develops, we'll see what happens," spokesman Ed Canaday said Thursday. "We've put a significant first stake in the ground."

    Under SEC rules, companies can sell securities without registering them as long as issues are limited to qualified institutional buyers, investors with at least $100 million of assets, and there are no more than 499 stockholders.

    GSTRuE is based on Goldman's RediPlus electronic trading system. Participants in the unregistered stock platform can view indicated bids and offers and last sale prices. Investors wanting buy or sell securities then must contact their broker to make a trade."(snip)


    Comments ?

    IMHO I found it rather disturbing that more new venture capital was raised via the private equity route than by stock exchange IPO's last year - given the fact that some of the newly formed private equity companies were worthwhile investment opportunities but that, as a small time investor, I was financially excluded from being able to participate.

    I am also told that this trend towards private equity / private capital is an outgrowth of the ponderous accounting requirements of the recent Sarbanes-Oxley laws. Companies operating under private equity rules are able to avoid potential millions of dollars worth of public accounting costs per year.

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    This is a platform for China to quietly spend it's trillion+ US dollars.

    No link, but china dumped $3 bill into Blackstone (A GS PE fund) last week.

    Paulson = genius? I think so.

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    Private equity doesn't always mean that smaller investors are excluded from participating in these large and lucrative deals. Private equity money doesn't just come out of thin air, the capital they are investing has to come from somewhere. Sometimes from wholesale investment funds that have already accepted capital from smaller retail investors.

    Take the recent (failed) attempt by private equity to buy Qantas in Australia. Two of the major players in the deal were Macquarie Bank, one of the largest, publicly listed merchant banks and fund managers in Australia and Allco Equity Partners, a listed investment company, whose shares are traded on the Australian Stock Exchange.

    Smaller investors may be unable to participate in these deals directly, but it appears that they can participate indirectly through other investment vehicles.

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    ^^^ however, in order for any small time investor to get a 'taste' of any private equity deal's profits, they are forced to buy into the whole enchalada ... i.e. buying shares of Macquarie bank stock would be weighted perhaps 5% as the result of Qantas, with the remaining 95% being spread over basic bank operations and other 'deals'. This is the functional equivalent of small time investors being denied the right to purchase stock in one particular company with promising stats, and instead being forced to buy shares of a mutual fund that does hold some shares of the one particular promising company, but also holds 20 times as many shares of ho-hum companies !

    As far as buying into Blackstone or another private equity fund directly, you'll find that the stock is only available to 'qualified investors' and that the minimum buy-in for an individual investor is six figures. This is due to the fact that these private equity groups are organized as limited partnerships rather than public corporations and are strictly limited in the number of 'partners' they take on !!!

    (snip)"Blackstone's IPO has drawn scrutiny from unions and politicians about its limited partnership structure, which allows it to avoid corporate taxes of as much as 35 percent on most income. The firm also won't be regulated as an investment company under the U.S. Investment Company Act of 1940. The AFL- CIO, the biggest labor union in the U.S., is urging the Securities and Exchange Commission to investigate the offering."(snip) from

    (snip)"For an individual to be considered a qualified investor (also termed an accredited investor), that person must either have a net worth of about a million bucks or have an annual income in excess of $200,000. Companies who wish to raise capital from individuals without issuing registered securities are forced to limit their search to people who fall on the happy side of these thresholds."(snip) from

    My concern over this private equity trend is not only being denied a 'pure play' on promising new companies who choose to go the private equity route to raise capital. In a longer time frame, because of the burdens of Sarbanes-Oxley etc. it would appear that a large number of new companies are choosing the private equity route rather than the public offering of stock route. Imagine what stocks the NASDAQ would consist of today had private equity come into the picture 10 years ago. Millions of small time investors would not have been able to take advantage of the huge gains made by companies like EBay, Google, Dell, YouTube etc. My fear is that tomorrow's hugely profitable companies which are being organized and financed today are taking the private equity route ... which benefits the very rich and excludes the small time investor from tomorrow's gains by these hugely profitable companies.

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    Can you honestly blame companies for trying to circumvent capital market regulations? Particularly if you can achieve significant cost savings by reducing the costs of compliance with SOX and IFRS, amongst others.

    I don't believe this is a sustainable long term trend. Private equity seems to be in vouge at the moment because of the abundance of low cost debt capital available, making these highly geared deals possible. When the business cycle turns, interest rates will go up, making debt capital more expensive compared with equity capital and making the IPO a preferred capital raising method.

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    Quote Originally Posted by beaniej View Post
    When the business cycle turns, interest rates will go up, making debt capital more expensive compared with equity capital and making the IPO a preferred capital raising method.
    What makes you think interest rates can go up from this point?

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    ^^^ it seems that we're unavoidably facing yet another important economic point which hinges on politics !

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    ^^^

    so let's just say all the macroeconomic factors point towards interest rates being WAY more likely to go up than down over a five year horizon.

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    ^^^
    That is my opinion too. For the past year, each quarterly monetary policy statement released by the Reserve Bank of Australia has said as much. The global economy is strong, capacity utilization is high and labor markets are tight.

    We haven't quite reached the tipping point on inflationary pressures yet, but it is more likley, central banks around the world are leaning towards a tightening bias to keep inflationary pressures under control.

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    Can you honestly blame companies for trying to circumvent capital market regulations? Particularly if you can achieve significant cost savings by reducing the costs of compliance with SOX and IFRS, amongst others.
    Obviously if I were organizing a company I would be looking to avoid the incredible SOX compliance costs now mandated for US public stock companies. I would look to private capital or at the very least list my company stock on a foreign exchange.

    However, this does not alter the fact that Sarbanes Oxley has now manifested the unintended consequence of providing a strong incentive for new companies to move beyond the jurisdiction of the SEC ... and in doing so make it far more difficult for 'small time investors' to invest in and profit from the future activities of these new companies ! Ironically, SOX was enacted after the Enron debacle in an attempt to prevent future 'small time investors' from losing money due to shady corporate governance. In point of fact it has also prevented future 'small time investors' from earning money due to good corporate governance, and has left it for very rich 'qualified investors' to earn all of that money instead !

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    Looks like the wheel is starting to turn. KKR has just announced it intends to go public in an IPO worth $1.25 billion. Read all about it here:

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    That is very sad for the public. They are going to gut the funds, and pass off the debt ridden carcass to the general public which will pay a premium to by anything invovled with LBO, PE, or Hedge funds.

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    ^^^ agreed ... the conspiracy theorists would tell you that the reason these private equity funds and hedge funds are now going public is that there is 'toxic waste' buried in their holdings (i.e. derivatives). By selling to the public, the private investors get to 'extract their equity' without being forced to sell derivatives on the open market (which would devalue the derivatives and thus their equity !).

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    I'd not thought about the prospect of derivatives. I was intrigued that they have been buying and buying for years - and one presumes that KKR run businesses fairly well - and they are just planning to pull out a few billion dollars at / near the top.

    It has struck me for a while that the big private equity deals must be being financed on ever lower quality ranked debt and that as such, some of these are going to blow up - as junk bonds invariably do.

    I would guess though that whilst KKR may make an attractive investment - and lets be honest, they are a little like Berkshire Hathaway for the range of companies they hold - that for a private investor to figure out the actual value of the company, and what a fair price might be MUST BE IMPOSSIBLE. Understanding their operations must be a minefield of debts, equity stakes, placements and partnerships.

    Not to mention the potential liabilities for currency contracts, futures and possible derivatives for any number of businesses.

    All in, it must be better not to think about it!!

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    Default Re: weekend commentary - 'Private Equity' yields private equity market only for the r

    that for a private investor to figure out the actual value of the company, and what a fair price might be MUST BE IMPOSSIBLE. Understanding their operations must be a minefield of debts, equity stakes, placements and partnerships.

    Not to mention the potential liabilities for currency contracts, futures and possible derivatives for any number of businesses.

    All in, it must be better not to think about it!!

    'Not thinking about it' appears to be exactly what's happening in regard to the average investors who are buying up IPO shares of these former private equity outfits based only on a 'feeling' that they must be a good investment. I have to agree with Lunchbox that the timing of these IPO's coinciding with the timing of 'toxic derivatives' news leaks certainly points to the possibility of private equity 'insiders' wanting to turn their private equity paper gains into cold hard cash before a derivatives meltdown saddles the new IPO shareholders with big fat losses.

    If the Chinese Gov't happens to be one of those new IPO shareholders to the tune of many billions of dollars, caveat emptor ! After all, speculation has it that the major reason the Chinese Gov't became interested in private equity investments (I guess this is starting to be referred to as sovereign wealth investments now ?) was to circumvent US gov't restrictions on the direct purchase / acquisition of 'strategic' US assets (i.e. Unocal) via the anonymity of private equity acquisitions instead. This anonymity of course disappears when a private equity firm becomes a public company via an IPO, which brings into play SEC disclosure regulations vis a vis major stockholders.

    Also, one of the 'tools' of private equity acquisitions seems to have been loading up the acquired company with high levels of long term debt (I've seen figures like 6-9 * annual earnings) in order to 'self-finance' part of the acquisition, and at the same time creating a hefty cash 'equity extraction' for the private equity firm acquiring the company. This situation could add to the woes of the IPO shareholders since the acquired company is inherently less able to generate future profits when saddled with substantial new long term debt payments.
    Last edited by Melonie; 07-08-2007 at 06:01 AM.

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