How to Play the End of the Private-Equity Boom

Getting in the Clear

Most of the speakers struck the same tone and there was a general feeling that it would be a year, perhaps two, before the debt logjam began to clear and the banks would be comfortable lending again.

In the meantime, deals will be much smaller than in 2006 and 2007 and a lot more attention will have to be paid to actually running the companies they buy. The party is over in this space, but everyone seems confident that once the hangover clears, a new one will begin eventually.

The Investment Angle

What does that mean for us, the regular investors who cannot leverage up 10:1 and buy whole companies? Quite a lot actually. The "private-equity put" is gone, so we need to be more selective about the quality of the stocks we buy. It is no longer viable to just assume someone else will come along and buy our stocks at higher prices. A large amount of the capital devoted to those purchases has dried up and blown away with the economic wind.

It may also start to make sense to pay attention to the debt prices of companies we are interested in buying. It might be that the debt has fallen to levels that are more attractive than buying the stock. That used to be a tricky game, but with Nasdaq Trace giving transparency to corporate bond pricing, it is a much easier game to play on a much more level playing field than days gone by.

Lastly, keep an eye on some of the publicly traded private-equity firms, such as Blackstone Group (BX Quote) and KKR Financial (KFN Quote). There will come a time when capital is washed out of the field and the survivors will be able to earn extraordinary returns once again. When they do, you will want to own these stocks.

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