MacFadyen: Tapping the Overhang
June 5, 2009
Last week the private equity world was abuzz with the latest overhang number. I’m personally excited to see this statistic return to the fore, as it can be one of the more tantalizing numbers to play around with. To wit, the $400 billion overhang implies a buying power of $800 billion, assuming a conservative 50/50 equity-to-debt ratio. Using bubble-era math, plugging in 20/80 equity-to-debt, that number is bumped up to $1.6 trillion, exceeding the GDPs of all but nine of the largest economies. Don’t worry Canada, you're susceptible to the mother of all consortium deals, but it would be a friendly buyout. (Just don't ask BCE.)
I don’t think the US government is necessarily unaware of the dry powder lying in wait, as Washington has made more than a few attempts to coax the money into public service. We’ve already seen it in the banking space (First Southern and United Bancorp), and we just saw it again in the auto sector, where General Motors, sitting on $30 billion of taxpayer dollars, agreed to finance Platinum Equity’s $3.6 billion buyout of bankrupt Delphi.
The idea of government-controlled banks and OEMs is still troubling. The fact that these infusions have perverted bankruptcy laws (Chrysler and Hartmarx) and emboldened politicians to make populist statements at the expense of capitalism is spooky stuff, to quote one distressed investor. At the same time, it’s good to see that the administration recognizes the potential of private capital and is slowly learning how to entice investors to play a role.
I don’t think it’s lost on the Obama administration that even with conservative math, the buying power of private equity exceeds his stimulus package. And that money, Wamu or Steve and Barry’s aside, could be considered part of a longer term solution that would realign interests and supplant the government’s role in the economy.
PE is eager to help, but the asset class has to be enticed by profits and clarity. Washington has gotten this right on a few occassions, but politicians have to remember the asset class has its own constituencies to answer to, and they're ironically the same folks -- pensioners, unions, retirees, etc. -- that legislators pander to.
1 Comments
Test?
Posted by: Ken M | June 5, 2009 11:16 AM
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