Posted by: admin | October 3, 2008

The bailout effect on PE

Introducing the newly designed US dollar.

So today Congress approved an unprecedented $700 billion government bailout of the battered financial industry sent it to President Bush who quickly signed it.  At its core, the bill gives the Treasury Department $700 billion to purchase bad mortgage-related securities that are weighing down the balance sheets of institutions that hold them.  The flow of credit in the U.S. economy has slowed, in some cases drying up, threatening the ability of businesses to conduct routine operations or expand, and adversely affecting consumers seeking financing for mortgages, cars and student loans. Some state governments have also experienced difficulty borrowing money.

What effect does this have on private equity funds?

The credit markets have gotten a lift from Uncle Sam.  PE shops will have easier access to debt financing for their deals, albeit not nearly as much, or as cheap for that matter, as they did during the mega LBO days of 2006-2007.  Funds seeking deals today can only lever them with senior debt 1-2x EBITDA and 2-3x sub debt as opposed to +5x a few years ago.

My firm is targeting an Oct. 31, 2008 close on a $60 million LBO.  Obtaining financing was hell.  A year or so ago if we sent out a financing prospetus to banks, we would have calls back the same day.  Today, we are the ones calling the banks back to see if they even looked at the deal.  Eventually, after much effort, we hired a 3rd party investment bank that specializes in private placement of debt to help us in obtaining financing.

On another note, the entrepreneur in me loves the following tie in between innovation and Fight Club’s subliminal enlightenment principals.  Check out the link below:

Tyler Durden’s 8 Rules of Innovation

Excerp: Tyler’s Seventh Rule of Innovation:

“Sticking feathers up your butt does not make you a chicken.”

On the other hand, wearing black hipster clothing and hanging in cafes smoking Gaulloises cigarettes does not make you creative. Buying a MacBook Pro and an iPhone doesn’t get it done either.

Creativity and innovation are mainly about hard work. It’s about constantly coming up with ideas and thinking through problems instead of vegging out. And it’s about taking action, plain and simple.

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