The brinkmanship continued into the courtroom. But in the end, even as a partner of Bain Capital, a private-equity giant, was testifying before a New York judge on May 13th, a consortium of big banks decided after all to provide the financing to take Clear Channel Communications, a media giant, private. After credit started to crunch last summer, the banks—Citigroup, Deutsche, Morgan Stanley, Credit Suisse, Royal Bank of Scotland and Wachovia—tried to wriggle out of their commitment to provide debt to Bain and its partner, Thomas H. Lee Partners, citing the “material adverse change” (MAC) clause found in every financing contract.
The decision to settle seems sensible. “There are considerable legal ambiguities around MAC clauses,” says Michael Ryan, a private-equity lawyer at Cleary Gottlieb Steen & Hamilton. In the end the banks agreed to finance a deal that values Clear Channel at $18 billion, down from the $19.4 billion approved by shareholders last September, so everybody gave a little ground. Shareholders are expected to agree to the new price.
The banks’ threat to walk away was the product of the extreme stress they were under during the credit crunch, and the settlement is a sign that normality is returning—and with it the realisation by banks and private-equity firms alike that they have a strong mutual interest in getting the lucrative private-equity bandwagon moving again as soon as possible. The first steps towards doing that are clearing the backlog of uncompleted deals and getting rid of the overhang of private-equity debt that banks have had to keep on their balance sheets when the expected buyers for it suddenly withdrew because of the lack of access to credit.
The biggest deal still to be sorted out is the $33 billion sale of BCE, a Canadian telecoms firm. Some deals have already been abandoned, such as the sale of Sallie Mae, a student-loan company, and many others have been renegotiated. There has been a lot of maneuvering on both sides of deals, says Franci Blassberg, a private-equity lawyer at Debevoise & Plimpton. For boards of companies that are waiting for their sales to private equity to be completed, one of the wisest strategies may be to wait, she says, because “if they press the issue now, whilst banks are stressed, the outcome is unlikely to be smooth, whereas things may be far better in a few months.”
Rumours of the death of private equity are proving to be greatly exaggerated. The leading firms, in particular, have continued to raise impressive amounts of new money, largely from institutional investors. There is no sign of a return of the megadeals that had become almost routine before the credit bubble burst last year, but private-equity firms, and their lawyers, have been extremely active. True, some of this activity is most notable for its creativity. For instance, there have been several cases in which one private-equity owner has sold a 49% stake in a firm in its portfolio to another private-equity firm. This allows the seller to realise a profit while allowing the existing debt financing to remain in place, sparing the new owner from having to refinance the deal.
Private-equity firms have also been buying up much of the private-equity debt held by the banks—often borrowing from the bank to do so. A hypothetical example of such a deal: a bank sells debt with a nominal value of $10 billion to a private-equity firm or consortium for $8 billion, lending the buyers $7 billion towards the price. The bank takes a $2 billion write-down, but reduces its overhang of non-performing debt and gets an additional $1 billion of equity, moving it one step back towards resuming normal activities. Meanwhile, the private-equity firm buys debt at a fire-sale price, and will probably end up making a killing.
The same may be true for private-equity firms with expertise in distressed banks, notably Texas Pacific Group, Apollo and J.C. Flowers, which are investing in financial-services firms badly hit by the credit crisis. There is also plenty of investment in established firms (without taking a controlling stake) and in infrastructure.
But the change in focus is leaving private-equity firms with “organisational issues”, says Josh Lerner of Harvard Business School. This is especially true of the biggest firms, which had expanded rapidly in recent years on the assumption they would be handling two or three megadeals a quarter. Different skills are needed to handle today’s private-equity activity, and that of the next year or two. So even as business picks up, it will be no surprise if for the first time ever, big private-equity firms announce lay-offs.