The Debt Trap

How leverage impacts private-equity performance

Sebastien Canderle

• Publisher: Harriman House
• Year: 2016
• eBook ISBN: 9780857195418
• Edition: 1
• Topic: Business
• Subtopic: Private Equity
• Index: Business

This is the inside story of private equity dealmaking.Over the last 40 years, LBO fund managers have demonstrated that they are good at making money for themselves and their investors. But when one looks beneath the surface of the transactions they engineer, it is apparent that these deals can, at times, go spectacularly wrong.Through 14 business stories, all emanating from the noughties' credit bubble and including headline-grabbing names like Caesars, Debenhams, EMI, Hertz, Seat Pagine Gialle and TXU, The Debt Trap shows how, via controversial practices like quick flips, repeat dividend recaps, heavy cost-cutting and asset-stripping, leveraged buyouts changed, for better or for worse, the way private companies are financed and managed today.From technological disruption in the worlds of music recording and business-directory publishing to economic turbulence in the gambling, real estate and energy sectors, highly levered corporations are often incapable of handling market corrections when debt commitments start piling up. Behind the historical events and the financial empires erected by some of the elite private equity specialists, these 14 in-depth case studies examine how value-maximising techniques and a short-cut mentality can impact investment returns and portfolio assets.Whether you are a PE practitioner, investor, business manager, academic or business student, you will find The Debt Trap to be an authoritative and fascinating account.

Chapter 1. Tricks of the Trade

“We’re not talking about brain surgery here.This is finance – add, subtract, multiply and divide.”1

Stephen Schwarzman, Chairman of The Blackstone Group

For those acquainted with general corporate finance principles, what follows will simply serve as a refresher course to frame the case studies in their appropriate context. For readers not au fait with the remarkable world of finance, this chapter should give a better understanding of why PE fund managers do the things they do.

The ultimate goal of all LBO operators – referred to as financial sponsors, general partners or GPs throughout this book – is to maximise the performance of the capital they manage on behalf of their institutional investors, the previously mentioned LPs. It is where their duty of care lies. And based on the evidence of the case studies presented hereinafter, not much can distract them from reaching that goal.

The reason behind this compulsive objective is competitive pressure. PE firms wrestle with a swarm of similar expert investors. There is indeed very little differentiation between the various GPs: their staff members are all former bankers or management consultants, many are chartered accountants or MBA graduates, they raise money from the same LPs, and all apply the same financial wizardry aiming to deliver performance. To put it very briefly, this means that they must achieve superior returns, often regardle...

Table of contents

• Contents
• Preface
• Abbreviations and Lexicon
• Introduction
• Chapter 1. Tricks of the Trade
• Part One. 
Asset-Shifting: Secondary Buyouts and their Offspring
• Chapter 2. Gala Coral – Game on!
• Part Two. 
Asset-Flipping: Recaps and Quick Flips, or the Art of Making a Quick Buck
• Chapter 3. Hertz – The Need for Speed
• Chapter 4. Celanese – Rich Chemistry
• Part Three. 
Financial Engineering and the Risks Pyramid
• Chapter 5. TXU – Power Struggles
• Chapter 6. EMI – Out of Tune
• Part Four. 
Repurchases or Relapse Buyouts: Seller’s Remorse
• Chapter 7. PHS – Washed-up
• Chapter 8. Frans Bonhomme – Down the Drain
• Part Five. 
Listing, Delisting, Relisting: On a Fool’s Errand
• Chapter 9. DX Group – Going Postal
• Chapter 10. Debenhams – Debt Never Goes Out Of Fashion
• Part Six. 
Private Investments in Public Equity: PIPE Dream or Nightmare?
• Chapter 11. PagesJaunes – The French Disconnection
• Chapter 12. Seat Pagine Gialle – The Italian Job
• Part Seven. 
PE-backed IPOs: The Search for a Patsy
• Chapter 13. eDreams – Reality Fights Back
• Chapter 14. Foxtons – Timing the Market
• Part Eight. 
Asset-Stripping: Modern-day Creative Destruction
• Chapter 15. Caesars Entertainment – PE’s Version of Strip Poker
• Part Nine. 
Trick or Treat
• Epilogue. Sheriffs and Cowboys
• Acknowledgements
• About the author