R.E.M. in the context of Private Equity

What follows is an article I submitted privately today that will never see publication anywhere else. My lawyers tell me I still have the rights to it, so I'm posting here just for fun. Because as soon as anyone thinks of fun, you just know the words "private equity" aren't far behind.

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If private equity had to choose a theme song, R.E.M.’s ‘It’s the End of the World as We Know It’ would be a top contender.

Henry Kravis, founding partner of the firm Kohlberg, Kravis and Roberts (KKR) might have had that song running through his head yesterday. Protesters from MoveOn.org, the Service Employees International Union (SEIU), and political and economic activists gathered outside of KKR offices in New York, Menlo Park, Calif., Hong Kong and London to voice their objections to the tax breaks and loopholes that private equity firms use to make billions of dollars on buyouts.

Other protests, organized in 24 countries on six continents, according to the Global Day of Action website, included a rally outside the campaign headquarters of Senator John McCain, the conservative United States presidential candidate, in Washington, D.C.

Activists organized these demonstrations to raise awareness about pending legislation in the U.S. Senate that would close some of those tax loopholes and, according to the petition on the Global Day of Action website, will “generate almost $31 billion in much-needed revenue over the next ten years.”

If the legislation passes, KKR may face the troubles already experienced by many of its competitors. Private equity firms saw unmitigated growth in the early and mid years of this decade, with nine of the ten largest private equity buyouts announced within an 18-month period between 2006 and 2007 according to Robert J. Samuelson of the Washington Post. But since the latter part of 2007, the sector has slowed to a crawl. The depression of the credit and housing markets have made it increasingly difficult for small firms to borrow funds from banks, which are decidedly more cautious in money lending, and many have had to close their doors.

Even larger firms, such as the D.C.-based Carlyle Group, have invested their own money in their companies to keep afloat. For Carlyle, this embarrassing incident, reported by the Washington Post in September 2007, was further compounded in March of this year when shares of Carlyle Capital fell nearly 90 per cent.

Carlyle would have liked to mimic the success of a third major U.S. private equity firm, The Blackstone Group. Blackstone went public in June 2007 and has enjoyed great success, if its 80-page 2007 Annual Report can be believed. But the company’s performance on the stock market tells a different story; the shares are presently estimated at $17.02, according to BusinessWeek.com, only thirteen months after it ended its first day of trading at $35.06.

Elsewhere in the world, the future does not look so bleak. The Glasgow Herald reported earlier this month that while the number of private equity deals in Scotland fell for the second time since 2006, firms “carried on spending freely,” with monetary investments increasing more than £200 million in the same time frame. The Birmingham Post stated last month that the government of the United Kingdom would begin to encourage private equity firms to do business abroad, citing China as a particularly favourite location due to “political and economic tensions between Beijing and the White House.” Should they succeed, much of Southeast Asia could follow suit in favouring British firms, causing more small U.S. private equity companies to close up shop.

On Blackstone’s first day of public trading, June 22, 2006, the NYSE had an unusual visitor. Author Tom Wolfe said to CNBC from the stock floor just before trading opened on that day, “We may be witnessing the end of capitalism as we know it.”

R.E.M. could definitely write a rock song about that.