Carlyle Fails To Bring It In Round 2

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On Friday, Wharton held its annual private equity and venture capital conference. Unfortunately there was no need for cops to intervene this time around, though there was a DEA officer on hand keeping an eye on speaker Andrew Sorkin. We sent correspondent Jeff Horwitz to check it out. Here are his findings.
The depressing state-of-the-industry talk at Wharton's Private Equity conference starts in the line for coffee. The title of this year's event is "Multiplicity without Rhythm," which is an M.C. Escher allusion meaning that everything is going to hell at once.
At the morning networking session at Philly's Park Hyatt Bellvue Hotel, a number of attendees swapped stories about last year's excitement, when angry SEIU activists with bullhorns bawled AT Carlyle's David Rubenstein for profiting on the backs of the poor and sick.
In hindsight, being vilified for making money doesn't seem so bad. Wharton has a cop posted outside the main ballroom of the Bellvue Hotel this year, but there weren't any protesters to be found. Still, you can't be too careful: It's always possible some belligerent pension funds might have shown up to demand their money back.
But that's getting ahead of things.


The day starts out with a pep talk from Philip Yea, head of the UK's 3i Group. It's a bad news/good news deal: The industry is besieged by GDP woes, dysfunctional credit markets, regulatory threats and public opinion. On the bright side, Private Equity "understands change" and LP's - even if they don't understand change -- can't immediately yank their money.
By the end of the morning networking session, it's apparent that Wharton students comprise a third of the crowd. Most of them would still love to get a job in private equity - one even came armed with a socially responsible, green energy business plan - but the industry's fortunes have left some of them a little restive. Andrew Ross Sorkin uses his afternoon keynote address to tell a packed ballroom that it needed to "get a grip" on the likelihood many of their firms are heading for a slow death.
This year's main event was a lunchtime Q&A with Apollo's Leon Black. His troubles with Linens 'n Things, Harrah's, Huntsman, Claire's etc. don't seem to have diminished his star power among smaller industry guys, who view Apollo as a bellwether for when credit might start trickling down again.
Black says he started buying senior, conforming debt last April, accumulating about $15 billion on a levered basis. Unfortunately, the market's gone from 80 cents on the dollar to 60, but Black's confident the play will pay off.
Black says Apollo is spending 60 percent of its time "playing defense" by improving the operations of its existing portfolio. Given a ten-year commitment from investors, he's not overly worried about short-term turbulence. Plus, everyone knows that Apollo cleaned up in previous downturns and the $15 billion fund it just closed shows it can still raise money.
Black, who once filed SEC documents in anticipation of an IPO, says that anyone who actually pulled one off is "sorry they did today." But, publicly traded equity firms have a bright future in the long term, he says, and it's a great solution to worries about succession. We may yet some day be able to buy shares of Apollo.
The panels, on topics like the future of hedge fund and private equity investing, mid-market PE funds, and leveraged buyout mega deals, were quite good. Some highlights, followed by attribution:
* Debtor-in-possession financing is dead. If you take a company into bankruptcy, don't be confident that you'll ever bring it back out. (Jeff Feinberg of Alvarez and Marsal)
* TARP hasn't noticeably improved a damn thing other than bank balance sheets yet, so it would be nice if the government kept pouring in more money. (Reginald Jones III of Greenbriar Equity Group)
* The degree to which debt is getting marked down is fueled by deleveraging and inconsistent with historical valuations. The average recovery by investors holding mid-market senior debt in a bankruptcy is north of 70 percent, but institutions like JP Morgan Chase are marking their books down much further (Rob Long of Allied Capital)
* Leverage is heavily limited. But given that unlevered senior debt at decent companies is now offering 15-20 percent returns and potential ownership stakes, adding volatility isn't necessary. (Black, Rob Long, and Peggy Koenig of Abry Partners)
* Buying debt in companies that a firm already holds an equity position in is going to be controversial. (KKR manging director Ryan Marshall maintains that it's ok, so long as separate groups with separate lawyers are involved. S.A.C. Capital Advisors' Paul Gordon says watching companies try to work out situations in which they're on both sides is going to be "fascinating," by which he means "a total disaster.")
* A huge wave of bank loans to the PE industry starts coming due in 2012 and won't crest until 2014. Hundreds of billions due each year, and there's no guarantee of refinancing. Anyone who's not already paring down costs to the greatest possible extent is screwed. (Garett Moran of The Blackstone Group)
* The government is going to have to get into the fire sale business soon in order to clear assets requiring management off its bank sheet. (Moran again)
* With the exception of the runup to the great depression, the overall ratio of credit to GDP has historically has been at around 1.7 times GDP. Today the ratio is at 3.5, and it's probably going to drop back to around 2. (Jack Daly, Goldman Sachs)
* Did we mention that we are suddenly brilliant when it comes to senior debt? (Everyone but Paul Gordon, who remarks that it's "bizarre to hear people talking about senior secured debt.")
* The business model of everyone but me in the PE/VC field is screwed and their LP's are howling about paying 2 and 20 on sidelined assets. But because of my firm's exceptional positioning and brilliance, my investors understand that we going to make a killing. (Again, pretty much every panelist is saying this - after all, there are LP's in the audience)
It might be this final consensus view that causes Sorkin to tell everybody they're being naive. His overall message is that most of them are large reptiles and the collapse of the credit markets was an asteroid strike. Sorkin says he talks to a lot of high-power people, and that the situation is, if anything, grimmer than it's been portrayed. A lot of people are going to have trouble staying in business past their next fund raising round, he says, and intrusive regulation is both on its way and likely to go overboard.
Sorkin also denies that the media killed Lehman, suggests that "provocative" Internet sites "like DealBreaker" stir up the market, and states, "if you believe in mark-to-market, you believe in journalism." This last line would be more compelling line if Black and multiple panelists hadn't spent the day disparaging FAS 157.
By the end of the day, it's clear that admitting to cautious optimism about the overall industry's future is to be considered a sign of idiocy. In a room of well over a hundred people gathered to hear the LBO mega deal panel, only two people have the guts to raise their hands in agreement with the statement that economy's prospects are "good" or "benign."
Open bar time with the Wharton MBA's, then back to New York. Disappointingly, none of the conference attendees is riding on the Bolt Bus, which is $50 cheaper than a coach-class Amtrak ticket. Maybe next year.

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