Is The Private Equity Industry Bad Or Mad?
I always thought the private equity industry was, quite simply, bad – but now it occurs to me that it might, actually, be mad.
Formula 1 started me thinking this way when the car manufacturing teams started moves to pull out of the current programme of racing events and start up their own car racing series.
This seems like a very sensible thing to do when you think that the current Formula 1 series is controlled by Bernie (‘Hitler Got Things Done’) Ecclestone, and Max (‘Herr Whippy’) Mosley.
Then it transpired that a private equity company, CVC, had bought the rights to Formula 1 off Ecclestone for around $3 billion.
If the racing car teams go off to do their own thing, these rights will be worth nothing.
Is it the act of a rational organisation to pay $3 billion for something so potentially unprotectable?
Then there’s Terra Firma the private equity firm which bought EMI at a valuation of £4 billion in 2007 and subsequently invested a further £500 million in the company.
Terra Firma has written off half its equity investment in EMI and is asking its bankers, Citigroup, to write off £500 million of the debt incurred in buying EMI.
About 18 months ago Terra Firma’s boss Guy Hands was calling bankers ‘whimpering dogs’ that ‘won’t come out of their baskets easily’ when they started pulling in their horns as the horrors of the sub-prime mortgage fiasco started to emerge.
Bad? Or mad?
In the semiconductor sector we’ve seen private equity house Blackstone buy Freescale at a valuation of $17.6 billion which was four times Freescale’s annual sales, and Kohlberg Kravis and Roberts buy NXP at a valuation of $11.6 billion which was 1.6 times NXP’s annual ales.
Then Blackstone and KKR imposed debts of $10 billion and $6 billion on Freescale and NXP respectively.
So are the private equity companies bad, or are they mad?