Wednesday, February 18, 2009

PEG's & US Toxic Debt

Just like many times before, private equity firms are picking up pieces of ‘profits’ in the otherwise rotten, (or as referred be some, toxic) bank assets. Will this help the new US Government in its somehow confused search for a way to do away with bad debt off the financial markets?

Possibly, but there are some limitations as to what PEG’s can do by themselves.
A number of private equity groups such as Black Rock are regarded as a potential white knights in their quest for turnaround of a bad debt into something more…profitable?.

Many are hopeful that PEG’s can scoop up what’s left and buy up so much bad debt that the burden will be removed from the Government and assist its hopeless search for a solutions to the current, and now global, financial crisis. There are huge issues with this proposition.

Firstly, the new US Government had been toying with the idea of creating a ‘bad debt’ bank that would aggregate debts (buy up bad debt) The US treasury announcement of a rescue plans (details) on the 10th of February have been extremely sketchy. So far, the consensus seems to be that a private/public investment fund, not a distressed/bad debt bank, would handle this.

Secondly, the idea of such a debt vehicle could give large leverage to private equity groups. There are significant conflict of interest considerations.

Lastly, while interest in bad debts restructuring seems appealing, without a larger investment vehicle to steer the process, there is just not enough that can be done by a small number of private equity firms who act alone.

The costs of bad/toxic debt are so enormous; it is surely delusional to think that PEG’s alone can make any significant impact.

by: Andrew Ochudzawa