Private Equity Trading
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Private Equity - Part 2 of 2
My feature concerning the possible troubles on the horizon for Private Equity vehicles hit the track running today with the news that Hedge fund Peloton has been forced to liquidate its assets with a virtual wipe out of client monies.
It was not that the fund was invested in weird or wonderful sub-prime/cdo/abc/xyz, collateralised, non-dom, whatsits. Its problem was that it appears to have been leveraged to buy reasonable quality but now illiquid asset backed securities (ABS). With the credit crunch draining away cash they were unable to finance the exposure and were forced to find buyers at any price. With no buyers they were forced into what appears to have been a fire sale. Selling quality assets at deep discounts means that the very people who were refusing to stump up the cash were probably then turning around and picking up the pieces for a song. It does not take much to see the investment banks swiftly making up their recent losses via this rather ruthless route.
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In this game, as mentioned in some of my comments before today, cash is becoming king. Those with it will be able to do very nicely indeed, those in need of it will either have to pay up substantially or go to the wall. The big private equity deals were very much built along the same lines where the asset backed security was the actual company being bought. If the credit crunch continues for much longer many of the deals which had been expected to offload their purchases via a stock market float will now be coming up for rollover of their initial financing deals. In a dog eat dog environment it does not take much of an imagination to see a large number of these projects unwinding as financiers ask for their money back rather than risk another loan period and then turn around and pick the asset up as the desperate borrower flails around for an exit.
The fact that Peloton (one of the more successful funds) was forced into liquidation does not bode well for the sector. A great number of very wealthy people have much of their assets locked up in various highly geared hedge funds of this nature. The list of funds not permitting withdrawals is getting bigger and as it rises so the rate of redemption closedown may increase as those still with a departure route see heavy withdrawals at a time when they are unable to sell the assets (at a reasonable price) which have been bought on the back of the margins placed by their backers.
A bit of an Armageddon scenario this comment and we are, of course, nowhere near this situation yet...but...the vulture funds are circling.
To read part 1, go to: Private Equity Markets.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'Private Equity Trading' edited by SD, updated 29-Feb-08
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