KUHN CAPITAL Tuesday, March 20, 2018
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Got a Problem with Crowds? Sell


A few months back we wrote a Dispatch on the entry of hedge funds into private equity deals. See Hedge Funds: PE Party Crasher.

Since then were also beginning to see giant financial services conglomerates crowding into the game. Examples: Merrill Lynchs participation in the Hertz buyout along with Clayton Dubilier and the Carlyle Group; and Blackstones purchase of an insurance company in combination with Goldman Sachs and Credit Suisse First Boston.

So far the Wall Street conglomerates seem content to let practiced PE firms take the lead. But we expect this will change as they gain experience and confidence. Theyre attracted to PE deals for the same reason as hedge funds: the returns on highly-leveraged equity have been stellar, especially in contrast to pinched hedge fund returns and a sideways stock market.

If history is any guide, this financial gold rush likely carries the seeds of its own demise. As deal prices are bid up amidst rising competition -- especially at the hands of less experienced players -- the leverage slathered on these transactions by dealmakers and their willing bankers will turn on them, toppling their precarious financial structures onto creditors and passive equity holders alike.

So a word to the owners of large companies considering a sale: do it now and dont take equity.

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