Short memories finance private equity payouts

November 2, 2010

By Timothy Sifert

Buyout barons are paying themselves on the back of the market’s short memory. Dividend recapitalizations are on pace to exceed the volume seen in 2007. Dunkin’ Brands and Getty Images mark the latest efforts by private equity firms to get ahead of a potential U.S. tax change. In their zealous quest for Treasury-topping returns, investors seem to have forgotten recent lessons.

The ability to replace equity with debt has come back with a vengeance. Buyout firms managed less than $2 billion of such dividend recaps over the last two years, according to Thomson Reuters LPC. This year, there have been $15 billion of them, with more than $5 billion queued up.

Private equity has good reason to rush these deals out the door. Selling portfolio companies onto public markets has been constrained, making it ever harder to return funds to investors. What’s more, the threat of tax hikes means they’re eager to write these checks before more winds up going to Uncle Sam.

Some big names are enticing lenders. Bain Capital, Carlyle and Thomas H. Lee are in the market with $2 billion of loans and bonds for the parent company of Dunkin’ Donuts, partly to give themselves a cash dividend. And Hellman & Friedman is paying itself $500 million after borrowing $1.3 billion for portfolio company Getty Images. Demand was so high, in fact, that the interest rate was cut 50 basis points to 4.25 percent over Libor.

Investors haven’t entirely overlooked the dangers of lining private equity pockets at the expense of the companies’ health. SK Capital Partners recently was forced to cancel a $922 million dividend for Ascend Performance Materials, which it had acquired last year with a mere $50 million of equity. But dangerous signs have re-emerged. High-yield bond investors bought $150 million of payment-in-kind toggle notes so Madison Dearborn could finance a dividend on the back of container maker BWAY Holding.

In some cases, of course, this may be less a case of amnesia than impatience. Too much cash and too few opportunities could be aligning the goals of private equity firms and debt investors. Neither can seem to help themselves.

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Who is the stupider? The investor seeking returns greater than bank interest at all costs, or the morally bankrupt thief running the investment or private equity house?
If someone steals a hangbag, the thief who has harmed the one is punished. But the private equity firms which represents shareholders by voting to pay themselves 30% of the money raised and saddling healthy companies with unhealthy debt, as in the case of Simmons, Dunkin Donuts, etc. are indeed the greater criminals. In the bankruptcy of Simmons, the equity firm which has robbed the journeymen of their pensions, jobs, and a future, pretended to be Robin Hood, but in fact, were the worse culprits. Unfortunately, their theft is celebrated for the money they made, and they are not even remotely punished for the pain of their poison. At least, the greatest of all thieves in living memory, Madoff, did not dispute his guilt or argue his sentence, unlike former Countrywide CEO Angelo Mazilo, who saddled the American people with 490 billion of underperforming or defaulting loans, while paying only $67.5 million “penalty and reparations to investors” to avoid prosecution from the SEC. White collar crime certainly does pay, and until jail sentences reflect the damage to society, we will continue to be shocked by the ‘bad boys of Wall Street.’

Frank, Bangkok

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