Tuesday, May 29, 2007
Despite talks of the sale of Avaya to private equity and a host of other current sale rumors over the past long weekend, the Wall Street Journal today goes with an article entitled Private Equity: Is Deal Frenzy Nearing an End? It is the usual, probably correct, stuff about over-inflated prices and Carlyle's recent decision to pull-back from the bidding frenzy. In this vein, I thought I would draw your attention to a recent article, the Eclipse of Private Equity, by Brian R. Cheffins & John Armour, two professors at Cambridge University Here is the abstract:
Private equity, characterized by firms operating as privately held partnerships organizing the acquisition and “taking private” of public companies, is currently dominating the business news due to deals growing rapidly in number and size. If the trend continues unabated, the 1989 prediction by economist Michael Jensen of “the eclipse of the public corporation” could be proved accurate soon. This paper argues matters will work out much differently, with private equity being at least partially eclipsed.
One possibility is that current market and legal conditions, which are highly congenial to public-to-private transactions, could be disrupted in ways that cause the private equity surge to stall or even go into reverse. The paper draws on history to make this point, discussing how the spectacular rise of conglomerates in the 1960s was reversed in subsequent decades and how the 1980s buyout boom led by LBO associations - the private equity firms of the day - collapsed. Factors that undercut conglomerate mergers and buyouts by LBO associations (e.g. the tightening of debt markets and increased regulation) potentially could do the same with the current wave of private equity buyouts, and cause at least a temporary eclipse of private equity deals.
Even if conditions remain favorable to private equity, its eclipse is likely to occur in a different way. Privacy has been a hallmark of private equity, with industry leaders operating as secretive partnerships that negotiate buyouts behind closed doors and restructure portfolio companies outside the public gaze. However, assuming market conditions remain sufficiently favorable, top private equity firms, following the lead of the Blackstone Group, may well carry out public offerings. If this happens, then even if the taking private of publicly quoted companies remains a mainstream pursuit, the exercise will occur largely under the umbrella of public markets.