There was a recent article in Fortune that outlined the bias of the FDIC against private equity (hat tip: Bank Lawyer’s Blog), to the point where a foreign bank beat out a consortium of U.S. investors including Blackstone Group and TPG.
The common perception is the private equity always behaves like this fascinating article about the fall of Simmons called “Profits for Buyout Firms as Company Debt Soared” subtitled: Flipped – how private equity dealmakers can win while there companies lose.
I highly recommend the above NYT article, and the video series, although anti-private equity.
Like homeowners under water with their mortgages, corporations can also be in the same predicament. And like the mortgage lenders who pushed bad mortgages, private equity also burdened perfectly good companies with excess debt.
Just as with the housing market, the good times ended when the economy fell into recession and the credit markets froze. Simmons is now groaning under a huge amount of debt at a time when its sales are slowing. And this time there is no escaping by finding yet another buyer willing to shoulder its entire burden.
Whatever the approach, high leverage is vulnerable economic swings. Private equity serves a role just like mortgage lending does. We are currently in vilify everyone mode.
However, I’m not sure that the FDIC is being prudent for good reason. Perhaps they are hoping to find money under the (Simmons) mattress.