Thursday, February 5, 2009

United States Capital LP Beginning To Force Legacy Investors Out

In surprising news, David Bonderman's TPG has announced it is dramatically scaling down its distressed financial investing strategy. The company, which recently raised $6 billion to invest in distressed financial opportunities, has announced it will return 25% of that amount to investors. "Distressed" has long been the capital raising straw man for both private equity companies and hedge funds, as it is broad enough not to define a specific approach (a great ploy when previously failed "narrow" strategies such as merger or convertible arbitrage would hinder new efforts in comparable fund raising campaigns). In a 180 degree turn, TPG told investors it was scaling back distressed financial investing as it was concerned the government's expanded role in the financial sector meant fewer opportunities for private sector firms.
Another PE titan, Carlyle, does not agree with TPG's view yet. According to a senior partner "Carlyle's view is that the government doesn't have enough money and will have to rely on private capital." While the second part is likely true, the first section is patently wrong in our opinion, as the Treasury has demonstrated just how worthless it thinks the off switch on the dollar printing presses is. Carlyle co-founder Bill Conway said "Would-be competitors, including many of the world's largest banks, may have trouble competing due to ongoing risk exposures associated with pre-existing assets."

A third point of view was presented by Chris Flowers, whose JC Flowers recently had some remarkable flame downs in the financial investment arena.

Mr Flowers has said he sees benefits in government involvement. In purchasing the assets of IndyMac a few weeks ago as part of a consortium, he said: “The downside is limited due to loss sharing with the government.”
Carlyle is currently raising a financial focused fund with a rumored $3 billion target, however the fundraising is allegedly so complicated, the offering memorandum does not list a hard target.

In our view, as the largest hedge fund in the world now is the U.S. government, whose cost of funding is zero, TPG 's scale-down example will likely be followed by more and more PE and HF firms, initially in the financial industry and subsequently in more verticals, especially as the government migrates out of financials and starts investing in other "critical" industries such as autos, airlines, and possibly moves to energy and consumer names.

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