In the standard telling, the eagerness of banks to lend money to private equity firms on the loosest terms was driven by an insatiable appetite for fees—fees for underwriting bond issuances, fees for organizing banking syndicates, fees for advising on deals. But was it worth it?
Not according to Morgan Stanley's Rob Kindler. In Deal Journal this morning, Kindler is quoted as saying: “When you net out all the profit versus all the losses, Wall Street hasn’t made money, it’s lost money.”
According to Kindler, the banks were "getting paid nothing" for the bridge financing they offered for acquisitions at the height of the buyout boom. And after the cost of original issue discounts on loans and reduced value of bridge equity held by the banks, Kindler says the boom was a loser for Wall Street.
Deal Journal's Dennis K. Berman runs the math:
Market research firm Dealogic shows that banks received roughly $34.2 billion in revenue in the past three years for all types of business associated with private equity — debt underwritings, M&A fees and all related transactions.
To post that steep of a loss, the banks would have to lose about 9.6% of the $353 billion bank loan and high-yield commitments created this year. That number seems hard to reach given that banks are selling off some of their loans at about 95 to 96 cents on the dollar.
But if you factor in the reduced value of the banks’ equity bridges — as well as some of the lower carrying costs for the remainder of the loans — Kindler’s estimate at least seems plausible.
So was it all for nothing? Well, not quite. Wall Street made lots of money during the boom. Even if the deals don't seem to be working out for banks and their shareholders, huge bonuses for people running these deals back when they seemed to be making money for their employers made many of them very wealthy, and made lots of the already wealthy even wealthier.
So rather than ask whether it was all for nothing, perhaps we should be asking the oldest question: cui bono? Were the worst follies of the buyout boom an agency cost?
The Private Equity Boom: A Net Loser for Wall Street? [Deal Journal]