Private equity, bubbles, history, and Warren Buffett

[FRED]

Private equity, bubbles, history, and Warren Buffett
November 9, 2006 (Corporate lawyer Adam Schwab - crikey.com.au)

The one thing that equity markets have taught us over hundreds of years is that investors have very short memories. From Tulipmania to the South Sea Bubble, Roaring Twenties to the Nifty Fifty in the late 1960s, and most recently the dot.com boom, investors have been prone to forgetfulness as they were driven by uninhibited greed.

Which brings us to today. While the markets are not in the midst of a bubble, with the possible exception of mining and media stocks, there's one hell of a private equity boom going on.

This is not surprising. For the past ten years private equity has been a veritable gold mine for the operators -- Pacific Brands, Repco, Just Jeans and JB Hi-Fi are some recent local success stories. Of course, those who get in on the ground floor of any boom invariably do well (you could have made a lot of money in tech stocks in 1999).

AntiSpin: See today's Recession 2007: Part III - The Impact of the Collapse of the Private Equity Bubble.

[Ishmael]

Re: Private equity, bubbles, history, and Warren Buffett

As the CFO of a PE deal where we took our $50 million investment and turned it into worth more than $1 billion in 18 months (we bought cheap), I have been wondering what exactly are these guys thinking. You have a company trading on a public exchange and put a 20% premium on it and buy it.

Since management is part of the deal the company must not be undervalued due to poor management. What kind of magic are they planning on putting on this company where they plan on getting a return. Since most PE guys come right off of Wall Street they know very little about actually running a company. I have had more than one screaming phone call from a PE guy about something that once you explain to them what happened (like I am legally required to pay our sales tax on the 7th business day of the month -- do you want me to get your permission every month to do this) they walk away like nothing happened.

All I can think is that they are hoping their buddies on Wall Street will repackage the deal and some how sell it for an even higher valuation.

It is interesting, since I have been part of three successful turnarounds I have been called by PE firms this week to assist with troubled companies. Act as a super CFO for them. These are first phone calls for this type of work. What do you think, is the bubble starting to pop. Unfortunately, if you load it up with more debt than the company can support because you paid too much there is only one way out.

Stay tuned.

[Ishmael]

Re: Private equity, bubbles, history, and Warren Buffett

As the CFO of a PE deal where we took our $50 million investment and turned it into worth more than $1 billion in 18 months (we bought cheap), I have been wondering what exactly are these guys thinking. You have a company trading on a public exchange and put a 20% premium on it and buy it.

Since management is part of the deal the company must not be undervalued due to poor management. What kind of magic are they planning on putting on this company to get a return out of their investment. Since most PE guys come right off of Wall Street they know very little about actually running a company. I have had more than one screaming phone call from a PE guy about something that once you explain to them what happened (like I am legally required to pay our sales tax on the 7th business day of the month -- do you want me to get your permission every month to do this) they walk away like nothing happened.

All I can think is that they are hoping their buddies on Wall Street will repackage the deal and some how sell it for an even higher valuation.

It is interesting, since I have been part of three successful turnarounds I have been called by two PE firms this week asking if I would assist with troubled companies. Act as a super CFO for them. These are first phone calls for this type of consulting work I have received. What do you think, is the bubble starting to pop. Unfortunately, if you load the company up with more debt than the company can support because you paid too much there is only one way out.

Stay tuned.