In recognition of the extreme volatility in the markets, the Group has undertaken a special exercise to value its largest investments at 31 December 2008… For those assets valued on an earnings basis at both 30 September 2008 and 31 December 2008, there was a negative total value movement of £(214)
That par from 3i’s trading statement, out yesterday. A negative revaluation of a couple hundred million is not much really, considering 3i has a portfolio of more than £5bn. Still, the private equity group’s share price has taken a hammering today. It was down 24 per cent at one point this morning on rumours that the group was going to have to go to the market for a cash call.
How long can the private equity delusion last? Surely these businesses are not performing this well. 3i’s somnolent shareholders seem to have woken up to that today anyway.
Given the performance of stock markets as a whole (down 40-50% +), is it really much of a stretch to imagine big writedowns for private equity’s formerly public holdings?
In the current climate, with unemployment beginning to spike and a true macroeconomic downturn only just beginning to bite, modelling companies’ worth based on (inflated) projected earnings is a fools game.
Here’s Nassim Nicholas Taleb’s take anyway:
Banks are being bailed out, and private-equity firms are going to go next. These people in a bull market look like geniuses. And now they don’t look that intelligent, and it’s going to get a lot worse for them. If the S&P goes down 20 percent from here, what will happen to private equity firms? They’re all under water.
Private equity is probably the ultimate leverage-based operation: everyone “looked like geniuses” in the bull market as Taleb says, because there was so much leverage around: any company that private equity touched escalated in value. Private equity giants know the power of leverage, too:
[Davos] Mr. Schwarzman is already making a splash. At a discussion panel on Wednesday, he hopped off his stool during a debate moderated by CNBC’s Maria Bartiromo, grabbed the microphone, and boldly called for what private equity loves: More leverage!
Related links:
Taleb foresees private equity firm failures if stock market falls – Naked Capitalism
Schwarzman’s bailout wishlist – Market Movers