Pass the Parcel

“Many of today’s apparently smart buyers could easily turn into tomorrow’s fools”, opines the WSJ, which mirrors recent remarks by semiconductor industry leaders that the private equity funds’ recent foray into the chip business, buying up NXP and Freescale, could turn out to be “very foolish”.

Nine out the ten largest leveraged buy-outs in history have been done in the last 18 months.

The problem with that, says the WSJ, is that someone has to be found to buy these companies, because the private equity funds, are only temporary owners looking to sell on their acquisitions for a profit.

Last year, private equity funds sold $250bn worth of investments, but raised over $320bn in new funds.

Since this $32bn allows the private equity funds to borrow a further $1.3trn for acquisitions, says the WSJ, it means that the private equity funds could he buying $1.6trn worth of companies which they would need to sell on for $2trn to make an acceptable profit.

With the IPO market only worth $200bn last year, a lot of these company sales would have to be made to either trade buyers or other private equity funds, because an IPO, a trade sale, or a sale to another private equity fund are the only three possible exit strategies.

$2trn, suggest the WSJ, is a lot for would-be purchasers to swallow, which is why some of these acquisitions could turn out to be seriously silly.

It’s a bit like pass the parcel. Don’t get caught when the music stops.