Fear Not the Private Equity 'Bubble'

Is there some handbook in the press that says it is important to write stories that portray private equity as a bubble? Is it necessary to read at least once a day that it can't continue?

What is the effect of these stories? I think its main effect is to get you out of the market. You figure it's a bubble. You figure that it will pop, like the housing bubble. Then you figure you will lose a huge amount of money when it does pop.

Is any of this necessarily true? Let's play it out.

What happens if it is a bubble and it bursts? Would stocks go down? I don't know. For the most part the companies that get these deals aren't expensive to begin with. Only one deal that I have seen, one deal for heaven's sake, targeted an expensive stock: Four Seasons (FS - commentary - Cramer's Take). The rest have pretty much involved companies that haven't done anything in years or are regarded as cyclical has-beens.

Second, the real worry if you think it is a bubble is in the high-yield bond market that funds this paper. I don't really care what happens to that market, because it doesn't directly impact the stocks that are trading now.

In fact, the only companies that I believe would be impacted by the end of the private equity bubble -- if there is one -- would be the brokers, but they trade at 10 times earnings anyway. That prices in both a bubble and its bursting.

Still, it must be a given that these frightening stories have to be churned out.

Look at it this way: The biggest bubbles of our generation, the dot-coms and the housing bubbles, both popped. And what were the consequences?

How about next to nothing?

Don't let the need of some writers to put out negative stuff dissuade you from being in. You can't win on the sidelines; people are winning in this game every day.

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At the time of publication, Cramer had no positions in any of the stocks mentioned in this post.

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