Sunday 7 January 2007

Private Equity Update

I have posted numerous times on the Private Equity business (here, here, here and here) and the threat it has to our economy. I notice that commenters' here are split as to whether this is true or not.

I understand the view that this is merely a working of capitalism in market form. However, what is missed is that an unregulated market has allowed distortion to grow. huge finance has been raised to buy poor-performing companies that have turned out to be not so easy to turn round, see here in today's Sunday Times.

So what I hear you ask? The only people losing money are the City capitalists? This is the devil though, as if these companies go into administration they may well use the pension pot for the staff or even if no buyer can be found, go bankrupt. Now they are only going to go into administration because they are so heavily indebted. Money the venture capitalists have already taken out in profit.

So the Venture Capitalists have lost their own money and possibly the livelihoods of the companies too. You may say these companies were doomed anyway; but the unsustainable level of debt they have been burdened with won't have helped, will it?

Earlier this week, Little Chef, was a near victim of this, being bought out at the last minute. This kind of Private Equity failure will hugely increase throughout this year due to crazy deals that have been completed in the last couple of years finally collapsing.

Don't expect 3% GDP growth for the economy this year.


Stan Bull said...

Apologies.I have re-linked to your blog. Teeting troubles with the new template. Apparently, borrowing by private equity firms currently stands equivalent to 43% of the total value of all the companies listed on the FTSE 100.
And there's no chance of the private equity frenzy abating...

Anonymous said...

I wish I understood high finance more, but maths is one of my failings. Glad to hear that Little Chef has been saved, not sure for how long, it will need updating, can't stay rooted in the past.

Anonymous said...

Little Chef has been saved? When did this happen?

Bel (

Rigger Mortice said...

the debt bubble will burst and whilst there is a school of thought at the mo that says the inflation we're experiencing is 'profit push' not cost push,my personal belief is that the sort of deficits the US is running on are unsustainable and any run on the dollar will push rates up.

the UK is similarly exposed.

James Higham said...

Would you put the past Rover shemozzle into this category?

CityUnslicker said...

Ellee/Bel - About half have been bought for nothing. How long they survive with such a poor busines model is difficult to know.

JH's ref to Rover is very perceptive as always. It is a similar mess. At least the government did not push £50 million down a hole this time.

Rigger- as usual, you ahev a good grasp of the curren situation. We can live with more debt at lower interest levels that historically, but not as much as we have run up.

pommygranate said...


Private Equity has been an unmitigated 'good thing' for the British economy.

It is an easy target to bash, though, as its professionals are paid vast sums of money often for doing no more than layering debt onto under-leveraged businesses and taking advantage of the interest-tax relief.

Far from worrying about businesses going under, I worry that not enough poorly performing businesses are being allowed to fail, as they are being kept alive by the largesse of overcapitalised banks.

Capitalism needs failures as well as success stories to survive.

Though loking at the latest crop of PE deals, i am fairly confident that failure is just around the corner.

Anonymous said...

we can take ourselves private again later. Only way to get proprietary dealflow.We urgently need a public market currency. To short sell our Los Angeles private equity.It is our master plan. Take everyone else private while we go public and the passive index trackers will only be able to buy us.Permanent capital -
10 year lockups just don't cut it anymore.Future fee monetization,getting out while we can...anything else plausible

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