Worst is Behind Private Equity

The credit crisis hit the private equity business extremely hard, as the seizure of credit markets made deal making a near impossibility. Not to mention the fact that companies already owned were often worth far less than the acquisition price. It is not too much of stretch to say that private equity is leveraged to the general health of the economy; making good times better, but bad times even worse. That is why it is great news to hear that Stephen Schwarzman, CEO of the largest private equity firm in the world, saying that he is seeing, “more than green shoots of recovery.” Schwarzman spoke reassuringly about his industries prospects to at a conference in Dubai, according to Reuters news wire.

“We do not expect the U.S. economy to slip back into recession but we do believe that weak consumer spending and continued constraints on bank lending will dampen the U.S. economic recovery in 2010 and 2011,” Schwarzman said at the Super Return Middle East conference in Dubai.

While it would take several years before “freely flowing but responsible credit” was re-established, the private equity industry was in a “radically different place” than a year ago, given signs of life in the bank financing market, he said.

“We can certainly do transactions in the $3-$4 billion range at this stage in the cycle,” he said on the sidelines of the conference. “And with low leverage involved, deals of that size can use in excess of $1 billion equity.” — Reuters 10/14/2009

Not only is Schwarzman offering up a slightly more optimistic tone, but his firm has stepped up in their deal making efforts recently. In the month of September, Blackstone (NYSE:BX) teamed up with CVC Partners in bidding for Bellsystem24, a Japanese telemarketing arm for Citigroup (NYSE:C). A few days later, in the same day Blackstone bought interests in a London office complex and sold a portion of its stake in Cineworld Group. Since then two blockbuster deals have come down from Blackstone in the last three weeks. One, they sold Orangina Schweppes to a Japanese firm Suntory Holdings, reportedly for about EUR2.6 billion. Then, in early October they announced a deal to buy theme park franchises from Anheuser-Busch InBev (NYSE:BUD) for $2.7 billion.

Schwarzman is seeing a lot of opportunity to buy assets on the cheap right now, and by the sound of it he may not be done yet. He referred to potential IPOs for some of his portfolio companies and said he is not sure how long that window will stay open. One thing is for sure, the improvement in the world economy has allowed his firm to take advantage of some wiggle room that simply was not there a year ago. Back then, everyone was starring off the edge of a crevasse and primarily concerned with capital preservation.

While we cannot say that credit markets are back to where they were prior to the crisis, they have begun to improve. That can be seen in the huge upswing in corporate debt and in the almost daily M&A activity. Schwarzman knows that there are challenges ahead, but he is never one to pass up a chance to make a profit. There is no doubt that he is one of the best deal makers in the world, and when he starts to get optimistic, there is reason for excitement among shareholders of Blackstone as the stock was up almost 8% today, largely because of Schwarzman’s take on the economy. As for Ockham, Blackstone is still too new of a (public) company for us to have a valuation rating on, but it is good to see a company and a CEO getting back to business.

Schwarzman: Worst is Behind Private Equity

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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