Saturday, November 29, 2008

PE funds need to talk straight

Private Equity can do with some straight talking.

“One of [PE’s] defining characteristics is never, ever, to admit to a mistake in public. By convention, most buy-out bosses maintain that they anticipated a recession and acted cautiously. In reality, the buy-out industry had its biggest-ever binge just before the bust began. Most big firms paid silly prices for companies using sillier levels of debt.”

I have solid data on PE investments in Indian companies at obscene valuations. Some of them were mandates that I had turned down because the asking price was too high. But there were ambitious investment bankers / fee hungry brokers that went ahead and goaded their PE clients to invest in. Result - every company in PE portfolio has its valuations deep underwater. Recognizing their liberty to keep it locked down for several years, the PE fund managers get away without marking their investments to market. But the pension funds and other investors in the Funds, have regulatory mandates advising them to mark down their investments and disclose the level of erosion.

Now I have mandates from three funds that badly need to reshuffle their portfolio. Tell you what? There are no takers even at this down to earth valuations, not even the owners and majority shareholders!


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