Pirate equity and buried treasure

By Henny Sender
Published: January 7 2009 02:00
Financial Times

In the next few weeks, private equity firms will send their investors grim letters telling them just how much - or little - the companies they invested in are worth today, with many executives saying the reported drop will be 20-30 per cent.

According to regulations that are applied this year for the first time, private equity firms are required to value their companies at what they would be worth in the market today rather than merely disclose the original cost of the investment.

By some calculations, the actual losses should far exceed 30 per cent since many of these companies were bought and taken private at the peak of the financial frenzy. In many deals - particularly ones struck in 2006 and 2007 - private equity firms paid a 25 per cent premium to public market levels to take their targets private.

They then put massive amounts of debt money into their companies, suggesting the drop in value should be more like 60 per cent, some industry experts estimate.

With public markets down about 40 per cent, the equity may well be worthless today - save for the fact that the private equity firms have years to try to restructure and restore value to their companies.