Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Private Equity and the Perfect Relationship


...the reason these firms are growing so quickly is that it's a perfect mutualistic, symbiotic relationship.


"In gambling, the many must lose in order that the few may win!"
-- George Bernard Shaw

Alternative investments have been attracting billions of dollars for those chasing double-digit returns. In 2005, investors poured $106 billion into U.S.-leveraged buyout funds, and that was more than double what they invested in 2004. But as attractive as the returns are, the reason these firms are growing so quickly is that it's a perfect mutualistic, symbiotic relationship.

A-ha! I suspect some of you have never heard of mutualism, which is the interaction between two or more species where both derive some sort of benefit. Mutualisms can be obligatory or non-obligatory. For example, the relationship between people and their pets is a non-obligatory mutualism for the human and, depending on the animal, it's either obligatory or non-obligatory.

My example of mutualistic symbiotic relationships on Wall Street is the investment banks that feed and thus fuel the private equity deals. The usual suspects -- Goldman Sachs (GS), JP Morgan (JPM), Merrill Lynch (MER) and Credit Suisse First Boston (CS) -- all know that the private equity firms will eventually bring some or all of what they've bought back to the market, creating a windfall in the way of fees generated by and for the investment bankers. The top two firms, JPMorgan and Goldman Sachs, generated a combined $1.8 billion in fees from such work last year. And, no doubt, this year's figure will easily top that!

Private equity firms sent $35 billion back to Wall Street as reintroductions last year, with the $2.1 billion May IPO of Burger King Holdings (BKC) as just one recent example. According to Forbes, the top six private equity firms control half of all private equity assets.

To wit, the massive Carlyle Group, Blackstone Group and Texas Pacific Group own companies with $122 billion in sales and upward of 700,000 employees! Not surprisingly, 10 of the Forbes 400 wealthiest Americans made the list by virtue of the wealth they've accumulated from running private equity firms.

As I write this, there are at least 2,700 funds with at least half a trillion dollars in cash to invest, and from where I sit, they've already made a dramatic impact on the investment landscape.

Why's That, Doc?

Because I have noted a significant change in the way these funds do business -- they've been teaming up on deals! Not only is this noteworthy due to the size of the deals that can be done, but it's also significant because the more people who get custody of valuable information about a pending takeover, the more likely that my computers will pick up insider trading patterns.

Think about that for a second. It's hard enough to keep folks working for Company A that is buying Company B from talking about what they know. It's why we see deals being announced on Mondays, as the boards of the two companies are typically sequestered during a weekend (when shares are not traded), thus reducing the information leaks as much as possible that are normally such an unavoidable part of such corporate meetings.

Imagine, if you will, how many people are part of the chain of information once a deal between two companies starts to come together. The legal staffs of each respective company, the boards, the investment bankers, etc. The list goes on and on.

Now imagine a deal that comes together with two or more private equity firms. You've dramatically expanded the number of folks who have access to that valuable information.

That's why I wasn't surprised when The Wall Street Journal ran a story about two or more private equity firms bidding for Harrah's (HET). It fit the profile completely.

My firm had unusual buying in Harrah's on Sept. 20 and 21. Both Harrah's and Boyd Gaming (BYD) hit our HeatSeeker program repeatedly. The buyers were jumping all over the HET Oct 70 Calls and the BYD calls at the $40 strike with both October and November expiration dates. I knew it was only a matter of time before one of them went from HeatSeeker to headline fodder, and I wasn't disappointed.

This morning as I prepared for my CBS radio show, I smiled broadly as I read in the WSJ that the world's largest casino operator (Harrah's) had received a $15.05 billion takeover bid from two private equity firms; Apollo Management and Texas Pacific Group! Shares skyrocketed from Friday's closing price of $66.43 to $80.01, a spectacular 20% gain overnight!

The HET Oct 70 Calls ended up running from 60 cents to $1.45 and went deep in-the-money, trading as high as $9.70. No doubt any big-money buyer who'd gotten into that trade had a very, VERY good day.

Did I say I love these private equity guys?

< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos