Neal St. Anthony: Era of excess ending for private equity that got greedy

Some of the huge private equity deals of 2007 have been justly mocked for excessive debt and huge paydays for the executives and the financial bagmen who lube the deals with others' money.

Even David Rubenstein, the head of the giant Carlyle Group, one of the biggest players that pool funds to take public companies private, conceded things got too frothy.

We're going from the golden era of private equity to the "purgatory era, where we are going to have to atone for our sins a bit," Rubenstein told those gathered at the World Economic Forum in Davos, Switzerland last month.

Amid reports of multimillion-dollar executive paydays at outfits such as Cerberus Capital, Carlyle and Bain Capital, the Wall Street Journal and others have reported about huge layoffs at companies they own and growing percentages of "distressed debt" in their portfolios.

Although some of these deals will need to be restructured, private equity isn't going away. Well-heeled investors as well as public and private pension funds are being advised to put 10 percent or more of their assets into such transactions.

What's changed, Minnesota executives and financiers told a forum sponsored by the Collaborative this week, is that sky-high valuations have come back to earth. Bankers have put on thicker glasses and are requiring more equity. And they're charging more for the loans, in the wake of big write-offs and declining earnings thanks partly to yesterday's excesses.

"When we went into Fidelity Investments to pitch our bond deal last year, there was no room in the reception area," recalled Gary Blackford, the CEO of Universal Hospital Services, which has gone through three ever-larger private recapitalizations since 1998. "I saw every investment banker I knew. The pendulum had swung too far."

Blackford doesn't worry about quarterly earnings.

"A lot of public investors are looking for short-term solutions," he said. "We get five to seven years to work on the business. [Management] signs up for [that period] and we don't get to cash out our options until the end. It keeps your attention."

Joe Morrison, CFO of IWCO Direct of Chanhassen, said he got a patient investor when Avista Capital Partners and IWCO's management spearheaded a "nearly $500 million" recap in 2007, more than double the amount raised in 2005. The fast-growing provider of mail inserts and marketing services for financial companies has revenue of nearly $300 million and is growing revenue 30 percent annually and operating profits by about 50 percent since 2002.

Avista, which bought the Star Tribune for $530 million in 2007, has found that newspapers are a tougher nut because of double-digit declines in advertising revenue. Still, nice to know that New York-based Avista has its Minnesota media portfolio hedged.

The Private Equity Council said in a recent study aimed at dispelling criticism of the industry that the swelling ranks of private-equity-owned companies have created 8 percent more jobs, on balance, than other companies this decade.

Bottom line, every Wall Street-driven financial trend, from junk bonds to mortgage securitization, is usually good in moderation. But at the margin, Wall Street is driven by greed. And there will be blowups. And the debris will always rain on Main Street.