Tuesday, January 31, 2006

Barton Biggs-Hedgehogging

Many of us, at least of a certain age, remember Barton Biggs as the Director of Research and later the Global Portfolio strategist for Morgan Stanley, back in the days when Morgan was a partnership. Whenever anybody said "Barton" all of us in the business knew exactly who was meant by this first name. Barton is a great observer of capital markets, amazingly shy, very understated and unassuming. He was always a great reviewer of important books as well as the first person I know to write of the Soros record. Barton left Morgan some years ago to work on a fund of funds hedge fund. He has written a terrific book on the phenomenon of hedge funds.

One of the areas that he seems skeptical of is private equity. As he writes:

"What the private equity guys are forcing their portfolio companies to do now is finance by issuing bonds in the high yield market in which there is plenty of demand for paper. They then use the proceeds to pay big special dividends. Of couse this loads more debt onto companies that are already highly leveraged."

"...in 2004, 77 dividends worth $13.5 billion were financed by junk-bond deals, and highly leveraged loans from banks paid another $9.4 billion in dividends."

Needless to say, this is no way to do corporate finance. Piling leverage on top of leverage to forc a dividend payout is obviously a highly risky and dangerous practice.

Another practice to look out for is the rapid turnover of portfolio companies among private equity funds. The selling of portfolio companies between private equity funds in order to book a gain and charge a 20% "performance" fee is outrageous. These "secondary buyouts" achieve little for the limited partner except increasing his leverage, reducing his participation, and pillaging him with egregious fees.

Though mutual funds have been soundly criticized for lackof performance and high fees, the current private equity arena seems to be the focus, in my opinion of worst practices. The fund of funds area is another sore point for me, but more about that at a later point.


At 6:40 PM, Blogger timothyb said...

I just came across your site, good commentary, keep up the good work.



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