Private-Equity Firms Face Turning Point

Desperate for help in cleaning up the banking mess, the FDIC last week loosened rules to make it easier for ­private-equity groups to buy failed banks. Score one for the barbarians. The new rules require firms to hold on to banks for three years, an acknowledgement of how private equity likes to operate: gobble up companies using cheap, borrowed money, strip them for parts, then spit the pieces back onto the market at a profit.
But for many buyout firms, that business model died with the credit crisis. And now some $430 billion borrowed during the buyout boom by big companies like Bain, KKR, and Blackstone will start coming due in 2012. Private-equity shops are also having a tough time raising cash--new fundraising for buyouts was down 78 percent in the first quarter compared with last year. Unable to sell companies they acquired for big bucks during the boom, buyout kings must now learn how to run the businesses they bought. Not all of them will catch on in time. Boston Consulting Group predicts that 20 to 40 percent of private-equity firms will go bust in the next two to three years. Long term, that might be a good thing. A thinning of the herd, coupled with a renewed focus on strengthening the companies they own--rather than gutting them for a quick profit--could bring the industry back into balance after a decade of excess. But if the FDIC isn't careful, some of those failed banks might end up being owned by failing private-equity firms.