Has boom in going private hit its peak?

Signs are appearing that private-equity groups may be having more difficulty making deals.

What does it mean when private-equity groups – some of the savviest investors on Wall Street – want to give you the opportunity to buy shares in their enterprise?

Some see it as a chance to make the kind of investment returns that bring visions of yachts bobbing off the beaches of St-Tropez. Or it could mean that the insiders at these companies think it will be harder to make money in the future and want to start cashing out now.

Either way, signs are appearing that private-equity groups may be having more difficulty making deals, and how they conduct business is starting to change.

As of last Friday, for between $31 and $35 per share, anyone could own stock in the Blackstone Group, one of the nation's premier private investors. Similar private-equity groups are reportedly poised to offer shares as well. This means that these groups, which were set up to make money for pension funds and millionaires, are now bringing their hard-charging ways to Main Street.

"The optimist would say this is a chance for the little man to ride the coattails of the fat cats. After all, no one in those companies plans to retire tomorrow: They still work 23 hours a day and make billions of dollars," says Sam Stovall, chief investment strategist at Standard & Poor's in New York. "The cynic says, 'If someone had the ability to triple their money, why tell me?' "

Private-equity groups make most of their money by acquiring companies, stripping the fat from them, and reselling them as more-profitable enterprises.

While many Americans may not be familiar with the companies themselves, they would know many brands owned by them. Blackstone, for example, owns the manufacturer of Gold Toe socks; Michaels, the nation's largest chain of craft stores; and Orangina, the European soft drink.

Kohlberg Kravis Roberts & Co., another private-equity firm, owns Hospital Corporation of America; Sealy, the bedding company; and Toys "R" Us.

But the climate for such dealmaking may be changing.

So far this year, the number of mergers and acquisitions has exceeded $2 trillion, up 57 percent compared with the same period last year. "But we were up 67 percent through the middle of May," says Mr. Stovall. "One reason could be these deals are becoming more costly, and that has resulted in deals not getting done."

The deals are getting more costly because long-term interest rates are rising. "The private-equity companies borrow money in huge amounts," says Axel Merk of Merk Investments in Palo Alto, Calif. "As rates move higher, the deals they do become less attractive."

At the same time, lenders have become more selective after the subprime mortgage market – which offers mortgages to lower-quality lenders – had large losses. "There has been a reprising of risk," says John Mousseau, vice president and portfolio manager at Cumberland Advisors in Vineland, N.J.

The risk of investing in private-equity funds and hedge funds was the subject of a letter written to the chairman of the Securities and Exchange Commission by Reps. Dennis Kucinich (D) of Ohio and Henry Waxman (D) of California.

"The value of public investors' interests in Blackstone LP would be tied to the performance of the underlying hedge and private equity funds, which have not been considered suitable investments for the general public because of their high risks and speculative nature," wrote the two congressmen, who urged the SEC to delay the Blackstone initial public offering that took place last Friday.

Representative Kucinich, the chairman of the Domestic Policy Subcommittee, plans to hold hearings on the matter on July 11, according to a spokeswoman.

Congress may also look into the tax rates paid by private-equity groups. The companies, which are set up as partnerships, have been paying taxes at a 15 percent capital-gains rate, according to reports. But they compete against firms such as Goldman Sachs, whose tax rate can be as high as 35 percent. Key Democratic lawmakers are considering the opportunity to raise new revenue to pay for other programs.

Blackstone and any other private-equity groups going public, traditionally very reticent to talk to the media, will also have to change the way they communicate, says Davia Temin, CEO of Temin and Co., a strategic-marketing firm in New York.

"They have not had to divulge a lot of information about themselves," she says. "They probably know all the rules. They just haven't been doing them."

Considering these changes, why go public? Diversification of personal assets might be one reason, says Clifford Smith Jr., professor of finance and economics at the University of Rochester's Simon Graduate School of Business. "It frees up personal funds," he says. "Here's a way to make sure if thing's don't look as rosy in the future, I have other irons in the fire."

According to The Wall Street Journal, Blackstone's CEO, Stephen Schwarzman, raised more than $900 million, and co-founder Peter Peterson collected $1.9 billion in the offering. Mr. Schwarzman will still own more than $7 billion of the company's stock and Mr. Peterson $1.35 billion, according to the Journal.

But others think it might be an indication that the era of large returns on private equity is ending. "If you're not at the top, you are approaching it," says Mr. Mousseau of Cumberland Advisors. "The smart money is getting out on the equity side."

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