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Forbes – In an op-ed in the Financial Times on Monday , I described the unraveling and demise of the shadow banking system that started with non-bank mortgage lenders, structured investment vehicles (SIVs) and conduits, major independent monoline broker dealers and money market funds. I then argued that the next leg of this unraveling would be hedge funds and private equity firms and their reckless leveraged buyouts (LBOs).
Let me now discuss in more detail this unraveling of parts of the hedge fund industry.
First, note that too much of the shadow banking system was about "Schmalpha" rather than "Alpha" (i.e. the returns that fund managers and asset managers–with their ridiculously high management fees of 2% or more–were getting by parting investors from a good chunk of their assets, rather than by superior absolute returns). In fact, the hedge-fund math of "2/20" was, most of the time, 2% for the fund managers and not 20% (sometimes single digit returns and, this year, actual negative ones) for investors. This scam is now unraveling.
Reuters – Private equity firm Blackstone Group LP’s chief operating officer said on Tuesday that the limit on bank financing for leveraged buyouts was about $5 billion.
But COO Tony James said there were multiple opportunities to invest despite the market turmoil and the limit on financing, adding the company has had a very active 12 months, investing $8.7 billion in 27 deals since the credit meltdown.
"People say you can’t do leveraged buyouts," said James. "That’s not correct. We are getting bank financing for LBOs (leveraged buyouts), but we’re not getting bank financing for deals over about $5 billion in size."
He said the current volatile market conditions were ideal times for Blackstone to invest.
"One could be forgiven for thinking this is a hostile environment for Blackstone," said James, speaking at a Lehman Brothers conference that was webcast. "I don’t agree at all. I think it’s a fantastic environment. Turmoil, discontinuity in the market and scarce capital are absolutely ideal forces for our businesses."
Blackstone has taken part in some of the largest leveraged buyouts ever, such as the $23 billion purchase of Equity Office Properties Trust, but has also done numerous smaller buyouts.
International Herald Tribune – Blackstone Group, manager of the world’s largest leveraged-buyout fund, said Wednesday that second-quarter profit beat analysts’ estimates as gains from hedge funds offset a decline in private-equity takeovers.
Net economic income, a measure that excludes some compensation costs, fell 75 percent to $165.6 million, or 15 cents a share, from $655 million, or 58 cents, a year earlier, the New York-based Blackstone said. That exceeded the average estimate of 8 cents a share by 10 analysts in a Bloomberg survey. Revenue declined 63 percent to $353.7 million.
Blackstone’s fees from buying and selling companies have plunged as buyouts of more than $2 billion dried up and initial public offerings fell to their lowest in four years. Investors backed away from the debt used to finance LBOs in the fallout from the collapse of subprime-mortgage securities in the second half of last year.
Bloomberg- When Blackstone Group LP, the world’s biggest buyout firm, was pursuing the takeover of the Weather Channel cable network earlier this month with General Electric Co. and Bain Capital LLC, Wall Street balked at providing financing.
So the New York-based company turned to GSO Capital Partners LP, the hedge-fund manager it acquired in March, to pull off the largest U.S. leveraged buyout this year.
Blackstone can’t wait for banks, stuck with almost $100 billion of debt from earlier LBOs, to start lending again. Instead, it’s pushing deeper into deal financing with GSO. The strategy may hurt the hedge-fund unit’s returns — some approaching 40 percent — if slowing economies lead companies taken private by Blackstone to default on their debt.
