Wednesday, July 11, 2007

Private Parties

In the past couple of weeks, since I started force feeding myself with current information again, I keep reading articles describing the massive growth of private equity.  That means what?  Instead of financing expansion via the erstwhile sexy IPOs, companies are now seeking funding from groups of investors instead.  It runs counter to some finance principles I picked up from Bobby O (my old finance teacher). For example, the pricing should be more appropriate if you have a big market (like to public).  If I remember right, that was the problem with private funding; the pricing (or interest rates) are not at market.

I should've known though that we normally gravitate towards the more sinful route.   So in the past years, when corporate governance became a byword with the 101 corporate scandals, companies began shying away from the public market.  Who wants the greater accountability, right?  And even then, one of the biggest knocks on being a public company is the public accountability.  These stringent standards paved the way for the Private Parties.

While I was reading a Business Week article though,  it seemed like this party has all the makings of a bubble.  I was reading an Asian Crisis book in one of my Bathroom Meditation Sessions (BMS) and some familiar words jumped at me while reading the Business Week Article. 

"...high-risk debt used to finance private equity deals, but banks have also loosened their lending requirements, helping to drive the record volume of leveraged buyouts (see, 6/4/07, "The Private Equity Effect"). The interest rates paid on bank loans dropped to all-time lows."

High-risk debt, loosened lending requirements and high liquidity.  Those are the condititions that make one want to spend, regardless of prudence.  Interesting isn't it? 

I'll read up more in the coming days.  If the story had you raising some eyebrows, it's just because I'm out of practice (disclaimer in hand). 

With references made to this article:


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