Banks to be disintermediated? or is that just replaced?
Is it actually distintermediation if the thing being disintermediated has ceased to function?
Henry Kravis of Kohlberg Kravis Roberts said in Davos that, as in essence banks aren’t playing their role of intermediating debt capital for buyouts, he would be going straight to the source, doing deals directly with investors who want to fund debt for deals.
Of course many of the institutions that used to fund buyouts, CLOs and CDOs for example, no longer exist and many like hedge funds have lower appetite. He acknowledged that leverage has “come down tremendously,” which might get the prize for biggest understatement of the week.
But, like Steve Schwarzman of Blackstone earlier in the week, he maintained that lower asset prices for deals originated now would help returns.
“You might be able to buy it with less leverage and you can still get the same returns because of the purchase price you are paying.”
I hope he means the same returns as old-fashioned vintage deals rather than the returns of 2006/07 originated ones.
Schwarzman earlier in the week on same subject:
“Private equity buying assets at bottom of the cycle.. if you just put one to one leverage on you should make 3-5 times your money doing that.”
Now we just need to figure out when the bottom of the cycle is!
My other question is how badly the recent vintage deals will do, many of which look very vulnerable. Private equity people are right to say that they have $400 billion of commitments, and that in the current environment that capital will be able to demand a very high (relative) rate of return as capital is scarce. But there is going to be a lot of very messy business to be done in the meantime with existing deals, and lots of potential for conflicts with existing investors who will be concerned with today’s bread rather than tomorrow’s jam.
Jim Saft is a Reuters columnist. Any views expressed are his own.