Private Equity Thrives Again, but...

Extracted 29SEP2011 from http://dealbook.nytimes.com/2010/09/29/private-equity-thrives-again-but-dark-...

The private equity industry has emerged from a treacherous two years on relatively solid footing. Default rates among the companies they control have dropped sharply and many have tapped into robust debt markets to push back the huge amounts of debt coming due in the next couple of years...

Private equity, however, may soon be facing its gravest challenge yet. Its most important constituents — the large public pension funds that provide it with more than half its capital — are weighing whether or not to stick with private equity in the coming years...

As deal activity has picked up, some private equity firms are turning to transactions whose merits have come under some criticism from their investor base. Among them are so-called secondary buyouts, which involves passing a company from one private equity firm to another. There have been a flurry of these transactions this year, amounting to a record 25 percent of the value of all private equity deals, according to Thomson Reuters...

These deals hold great appeal in the private equity ecosystem... But secondary buyouts have a mixed reputation among private equity investors... In some instances, these investors are selling a company through one private equity firm and buying it — at a higher price — through another firm.

Another hot button among the industry’s critics is the resurgence of the dividend deal, or dividend recap... critics of these so-called dividend recap deals say they only add strain, in terms of borrowed funds on the balance sheets of companies, at a time when the economic outlook remains cloudy.