Long-time readers of Abnormal Returns know that we have had an interest in the rapid growth in private equity. The profile of private equity has risen to push the influence of the once media darling, hedge funds aside. Hedge funds seem to get in the news to the degree to which they invest in private equity.

The influence of private equity extending from the media through all manner of the capital markets (both equity and high yield debt) continues apace. With growing talk of a top in private equity we through it would be worthwhile passing along a few more items on the topic.

Equity Private looks at the dismal performance of private equity IPO that is Burger King (BKC). Having nailed it the first time around Equity Private looks at the warning signs that were out there for all to see and the seemingly banal actions the firm is taking to try and turn around what has been a poor performer to-date.

Jeff Matthews also uses the Burger King news as a jumping off point to make some bigger picture points on the world of private equity. Matthews also notes the limited value that Burger King has done to add value and notes the growing trend of private equity firms “stretching” to do ever bigger deals.

Lower margin of error + lower deal quality = recipe for disaster. […]

But now I’ll go out on what I think is an even stronger, sturdier limb and call 2007 The Year of the Private-Equity Crisis.

Let the buyers beware.

Jenny Anderson in the New York Times has a nice overview article on the various threads that make up the convergence between investment banking, private equity and hedge funds. Anderson uses the news that Lehman Brothers (LEH) has raised its own private equity fund as symbol of the private equity steamroller. These firms thrive on providing their clients with what they want and for the moment they want private equity.

“Institutional investors have been clamoring for private equity,” said Erik R. Hirsch, chief investment officer at Hamilton Lane, which acts as a consultant to institutional investors. “It’s natural — the banks are providing what clients are asking for.”

Although it is not a particularly new phenomenon the fact that some mutual funds now are taking on some private equity-like positions is also worth noting. Eleanor Laise in the Wall Street Journal reports on this trend. While these transactions are permissible they do raise some thorny questions on position pricing and illiquidity.

We are not as confident as Jeff Matthews that 2007 will be the year of the private equity crack-up. For the moment there remains substantial momentum behind this trend. However when the crack-up does come do not be surprised to see the firms that have private equity and hedge funds under the same roof to try and profit from the demise of firms in which they had invested. Like the investment banks who are trying to extract as much profit from every transaction, there is an insatiable desire for “alpha” wherever it may lie.

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