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Private equity squeezes $202bn profit from an increasingly sceptical world

The Australian
Tom Bawden, New York
October 17, 2006

PRIVATE equity firms have earned worldwide profits of $US152 billion ($202.5 billion) in disposals made in the past year, a figure that will fuel the backlash against the industry's rapidly growing economic power.

Firms including Permira, Blackstone and Kohlberg Kravis Roberts (KKR) jointly returned $US130 billion of profits to investors and retained a further $US22 billion themselves from sales, floats and refinancings, according to Private Equity Intelligence, a research group.

Bain Capital, Texas Pacific and Goldman Sachs are expected to net about $US2 billion in profits by the time they finish divesting their stakes in Burger King, which they floated in May after three years' joint ownership.

Debenhams, the chain store, which also floated in May, is on course to yield CVC Capital Partners, Merrill Lynch and Texas Pacific more than pound stg. 500 million ($1.24 billion).

The bulk of private equity profits are made from the sale of investments that are between three and seven years old - the typical period of ownership. (DJ Ho - I quoted approximately 5 to 10 years)

Last week, the US Department of Justice launched an investigation into possible collusion among leading private equity firms to keep down the prices they pay for companies. The buyout firms KKR, Carlyle Group and Silver Lake Partners are understood to be among firms from which the department has requested information.

Institutions have argued that management buyouts - as distinct from those private equity deals not involving the target company's executives - are an area of particular concern to institutions because, they say, these deals pose significant conflicts of interest.

The managers had a fiduciary duty to get the best possible price for their company, but, on a personal level, the lower the price the greater their potential payout when the business was next sold.