Private Equity's Comeuppance

Last Wednesday's Wall Street Journal had an article highlighting the challenges of private equity firms attempting to cash out of firms via IPOs in the current thin market for such issues.

The overall thrust of the article was simply that the private equity groups are now facing the fact that they constitute the bulk of IPOs and, as such, might drive down prices for the firms they are now trying to unload. And that many are under the pressure of expiring fund pools to liquefy their gains via sale of the firms they once took private.

But my own takeaway was that, as with all markets, timing is everything. And what seems to be a great strategy at one point in time can become a curse at another time.

In fact, this article illustrated to me that there is a second risk to the private equity business besides the one that recently became evident by Cerberus' debacle with Chrysler and GMAC. That problem is simply too many private equity firms chasing too few opportunities, leading to deals with little chance of paying off. Combinations of excessive prices paid by the private equity groups, and poor choice of targets, results in some deals never making it through the process and back out into the public markets.

Now, in addition to failure on the front end of the private equity process, however, we see that simply having a fund near its dissolution date can result in a group having to dump properties back into the equity markets at a bad time. Not only are there few other IPOs, but, in the current market, it's not clear that prices will be the best they could be.

Seems all is not unalloyed gold in the private equity business, after all.