Monday, December 1, 2008 0 comments ++[ CLICK TO COMMENT ]++

Private Equity goes bust

One of the good things about the current implosion in asset markets is that small investors (and retail investors in general) never had a chance to invest in the most toxic of assets. This doesn't mean that an average person won't be impacted indirectly by losses (they surely will feel losses in their pension funds and other "sophisticated" investors.) In contrast, the last major bubble, the dot-com bubble, aka the TMT (technology/media/telecommunications) bubble, involved heavy involvement by retail investors.

In the current meltdown, the toxic assets include structured products (e.g. CDO of subprime mortgages) and private equity holdings. Small investors had no chance to participate in these lovely investments (hmm, that's assuming you didn't invest in a monoline bond insurer ;) or a financial institution holding such assets). The stock market may be down 25% but private equity assets may be down 50% to 100%(!). An article from Bloomberg talks about the meltdown in private equity and the difficulty of university endowments are having unloading their stakes:

Crippled financial firms such as American International Group Inc. and bankrupt Lehman Brothers Holdings Inc. are joining strapped endowments such as the ones at Columbia University in New York and Duke University in Durham, North Carolina, in trying to sell private-equity stakes. A deepening global recession that is crimping the value of buyout firms’ holdings is forcing further price cuts in a market where buyers already are scarce.

“There’s a huge supply-demand imbalance,” said David De Weese, a general partner at Paul Capital Partners in New York, which manages $6.6 billion. As much as 10 percent of the world’s $1.2 trillion of private-equity interests may change hands next year in the so-called secondary market, up from an average turnover of about 1 percent, De Weese said.

...

KKR, which has about $60 billion of assets under management, told investors last month that the value of its holdings, including the former TXU Corp. and Eindhoven, Netherlands-based semiconductor manufacturer NXP BV, declined in the most recent quarter. KKR also marked down to zero its holding in Canadian door maker Masonite, which was valued at about $650 million by S&P in 2005.


Jeremy Grantham speculated that a lot of the losses of any correction would accrue to Private Equity investors and they certainly are starting to take big losses.

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