Private equity turns to sovereign funds

[Joanne98]

Private equity turns to sovereign funds

By Martin Arnold in Munich

Published: February 27 2008 19:21 | Last updated: February 28 2008 01:06

Private equity firms are now approaching sovereign wealth funds for loans for big leveraged acquisitions, filling the gap left by investment banks struggling with the credit squeeze, leading buy-out bosses said on Wednesday.

Guy Hands, head of Terra Firma, and David Rubenstein, head of the Carlyle Group, told the Super Return conference in Munich that private-equity firms were already talking to wealthy state-backed funds in the Middle East and Asia about raising debt.

The moves show that leveraged buy-out firms are realising the credit squeeze may last longer than first expected. The $200bn of impaired LBO debt that banks are still trying to sell may mean they cut back on new private equity loans for 18-24 months, buy-out executives now forecast.

“Effectively you will just intermediate Wall Street and the City of London out of the picture,” said Mr Hands. “It is already happening.” He said the Abu Dhabi Investment Authority (ADIA), the world’s biggest SWF, “will effectively replace Wall Street”.

Mr Rubenstein said: “One thing you can say about business is that whenever there is a vacuum, people go in to fill it.”

He said there were four main sources of alternative debt financing: SWFs, public pension funds, hedge funds and mutual funds. “I expect you will see some more of this,” he said.

While no buy-outs have raised debt directly from SWFs, some have been part-funded by hedge funds and mutual funds, such as Hellman & Friedman’s purchase of Goodman Global, the US manufacturing group, in October.

However, the Carlyle boss said the vacuum was unlikely to be filled by alternative debt investors for long. “I don’t think you’ll see them in this for the long term, as the returns are not attractive enough,” he said, predicting that once banks had recovered from the credit squeeze they would edge out the newcomers again with cheap debt.

http://www.ft.com/cms/s/0/2057fc20-e566-11dc-9334-0000779fd2ac.html

[mslack]

1. Scary

I find this kind of scary considering the majority of
sovereign wealth funds are located in the middle east, its
like what the Chinese have done with u.s currency reserves. We
are owning less and less of are own country.