So I was sitting there at the Buyouts East private equity conference today, listening to a discussion on “Trudging Through the Credit Winter.” It was a bunch of mid-career guys—mostly from PE firms but also a lawyer and a couple of lenders—talking about how it’s really tough out there but they’re coming up with creative ways to do deals and these trying times will eventually pass. My favorite quote was from Phil Canfield, a principal at PE firm GTCR: “I think there will be financial institutions five years from now.” Good to know!
Anyway, the tone was somewhat encouraging. It’s at times like these that private equity firms most obviously serve a useful economic purpose, I was thinking. Good on them—even if they don’t deserve that tax break.
Then the mid-career guys wrapped up their panel discussion and went back to their seats, and this Old Testament prophet walked up on stage. His name was George Siguler, and he’s co-founder of the “multi-strategy” private equity firm Siguler & Guff. I’d never heard of him before, but he’s had his hands in all sorts of interesting things over the years. He was a founding partner of the Harvard Management Co., which runs Harvard’s huge endowment, in the 1970s. He worked in the Reagan administration. He’s got lots of experience with the venture capital business. He had big investments in Russia in the late 1990s. He even invested in John Paulson’s now-famous fund that correctly bet on the subprime mortgage meltdown in 2007—although he said he didn’t invest nearly as much as he should have.
Anyway, Siguler started off by saying that the previous panel discussion had reminded him of similar discussions at venture capital events in 2001. The VCs all talked about how we were going through a healthy post-bubble correction, and things would soon get back to normal. “Nine years later there’s still no venture capital industry to speak of,” Siguler said. “The average venture capital deal burns $75 million to create $40 million.”
In private equity, he went on, “there’s still this notion that things will go back to normal.” They won’t.
By this time I was frantically taking notes. I really couldn’t keep up, but here are at least a few excerpts from the Book of George:
“This AIG circumstance ought to be a lesson to everybody in this room. There’s a big portion of America who doesn’t think very highly of us, and some of it for good cause.”
“When you look at the wealth destruction and the $18 billion paid in Wall Street bonuses, it’s just out of whack.” There are lots of people in Detroit and all over America (I’m paraphrasing from memory here) who work just as hard as people on Wall Street and didn’t happen to be lucky enough to get into a business that paid insanely well. “People making $150,000 a year at the Treasury Department are trying to bail us out of our problems, and they’re working hard.”
On private equity: “We’re a fiduciary. We have the obligation to increase the wealth of our clients. That’s just been lost.”
“The only time the private equity industry adds value is in deals done during and coming out of a recession.” But that’s not going to help any fund that has already invested its money. “If it’s 70% invested today, it’s toast.”
“$1 trillion in high-yield paper [much of it financing private equity deals] is going to mature in the next four years. Where’s that cash going to come from?”
“The available universe of companies that buyouts can buy are essentially mediocre companies, and mediocre companies are going to have a much tougher time” in the economic climate of the next few years. The really good deals right now are in brand-name publicly traded companies that any investor can buy. “We will never see great companies at this price again in our lifetimes.” Private equity firms are “paying 8x multiples for tertiary mid-market companies and Boeing, a duopoly whose major competitor is run by the French government, is selling for ten times earnings.”
“The ideal investment in the world is an unregulated, life-essential monopoly. Secondary and tertiary players are going to have a much harder time, and those are the usual targets of LBOs.”
“China is a lot closer to working its way out of this than the Western press tells us.” Brazil and India are doing fine too. “Eastern Europe is a basket case. They don’t really have any competitive advantage.”
“We’re just beginning the crisis in commercial real estate. This cycle will be worse that the early-1990s RTC cycle.” As a result, lots of community banks will fail. “Banks are no longer very diversified. Securitization took credit cards and consumer mortgages off their balance sheets. Look at bank balance sheets and they’re very heavily invested in commercial real estate and construction loans.”
After the talk, I went up to Siguler and said he’d made me feel halfway good about working in the media business, meaning that he made private equity sound at least as messed up as magazines. He of course responded with a barrage of reasons why media companies are toast. Great!
Update: Here’s another account of the same talk.