Now that Blackstone and KKR have gone public and raised collectively about 5.5bn dollars for non-voting rights to a portion of their revenues, raised from those we could assume are close to retail players in the market, one school of thought says, it’s peaked. The question has become when, not if. As interest rates rise (debt costs more, and debt is one of the main features of these deals), people are looking for “stresses” on done deals and backing out of incomplete ones.
One of the interesting features of this boom that will shortly be tested, I think, is the longtermism/shortermism debate. PE and hedge funds who have loaned them money have argued that this time, they are owners in it for the long haul. They are making long-term investment decisions not short-term buy-outs. They’ve gone and convinced a good deal of the political class (never hard to convince if money is behind it), more surprisingly, the union movement in North America (but note, not at all in the EU) and a whack of academics including some surprising candidates, like Bill Bratton, who last year wrote that the evidence (to date, of course) supported the contention that these buy-out artists were acting like long-term owners. At the time, I suggested that he wait until one full business cycle was complete before there could be any real evidence — everyone likes a rising market, but the knives come out in a falling one — and if not a full 10-year business cycle, at least a tightening of the credit market. It’ll be interesting to see what Bratton comes up with.
More freakish, though, is the role of pension funds, those erstwhile institutional investors who are often not only labour-friendly in their governance, but in their membership and their investment mandates. Back in 1996, the great hope was that these behemoths would do the job that LBO artists like KKR would not, that is, be long-term owners making mostly passive but sometimes active decisions in the best interests of the going concern of the company.
Signs are there that this may be an untenable position. Pension funds have been co-investors with the LBO artists and in the latest deal, BCE, Teachers has connived to own over 50% of the bought-out Bell (which begs a questi0n about the statutory prohibition on owning more than 30% of the voting shares of a single company - but this was never seriously enforced anyway). Normally, a pension fund owning a lot of your stock would be carte blanche to conduct business as usual. Not this time however, as President Lamoreaux of the Teacher’s fund made two rather telling statements immediately after the deal: first, he thought that the Board of BCE was “too active” in soliciting other bids, and should not have, which is pretty rich coming from the leader of Canadian good governance, and second, he said “179 degrees of change are possible” with the management of BCE. He’s acting like an owner all right, and like one with specific ideas of how to run a former telecom monopoly.
It begs the larger question: what do these funds (PEs or PFs) know about running these firms that their previous owners did not? What do Cerberus and Teachers know about running Chrysler that Dieter of Daimler didn’t? We don’t know, and we don’t even have clues, because they don’t have to file a prospectus to take a company private. We must wait for the credit markets to tighten and the business cycle to work before we have a better idea. All bets are on.
Update: At its IPO, Blackstone sold at 31$, climbed briefly to $36 after the opening of trading, and is now trading under $31 consistently. Looks like they didn’t leave much money on the table. A cynic would say this wwas one more way for the owners to squeeze money out of their business as the climate for deals goes south.
