Via Paul Kedrosky’s blog, I came across this column by Nouriel Roubini, whose predictions about this financial crisis so far have come true with astonishing precision. He address where he sees the contagion spreading next. In short, first the hedge funds will fall, then private equity firms will crumble:
Even private equity firms and their reckless, highly leveraged buy-outs will not be spared. The private equity bubble led to more than $1,000bn of LBOs that should never have occurred. The run on these LBOs is slowed by the existence of “convenant-lite” clauses, which do not include traditional default triggers, and “payment-in-kind toggles”, which allow borrowers to defer cash interest payments and accrue more debt, but these only delay the eventual refinancing crisis and will make uglier the bankruptcy that will follow. Even the largest LBOs, such as GMAC and Chrysler, are now at risk.
Roubini doesn’t mention that other gargantuan private equity buyout of the last year, BCE, at $50 billion. Wait a minute, you say, the buyer wasn’t a shodily-run Wall Street firm, but the highly-respected investment arm of the Ontario Teachers’ Pension Plan. Doesn’t matter. To do the deal Teachers’ teamed up with U.S. firms Providence Equity Partners and Madison Dearborn Partners. In fact, a large number of Canadian companies were gobbled up by, or received huge investments from, U.S. private equity players (CanWest, Masonite, Hudson’s Bay Co., the list goes on… ) The obvious question is, what happens if Roubini is proven right yet again, and those PE firms controlling a vast swath of the Canadian corporate landscape go the way of Bear Stearns and Lehman Brothers?