After the dot-com bubble burst in 2000, all markets collapsed. However, amidst the rubble, private equity found a bid.
In September 2003, the Carlyle Group and Welsh, Carson, Anderson & Stowe closed the second and final part (Dex West) of their purchase of Qwest Communications’ yellow page directories business. The second part of the transaction was valued at $4.3 billion. The close of Dex West marked the completion of the $7 billion transaction, which was the largest U.S. buyout since 1989 and the third largest in American history. This was the beginning of a private equity boom that grew larger all the way up to just before the crash.
Kohlberg Kravis Roberts and Texas Pacific Group bought TXU Corporation, the largest power producer in Texas, for $45 billion in February 2007. It was the largest leveraged buyout ever. Seven years later, they filed for bankruptcy.
2008 changed the entire financial world, including private equity. The crash punished bad decision making and forced even the best managers into tough spots. As the recovery slowly meanders forward, the dramatic industry shifts and difficult lessons of 2008 become clearer than ever before.
The leaders of Bain’s private equity group wrote an important article called “The New Rules of Private Equity Success.” When Bain speaks, you should listen closely. The authors describe the “new normal” in the marketplace, a state of ultra-competitive business in which only the very best survive. The market is saturated with “premium-priced assets,” which doesn’t make buying low and selling high the easiest job. While it may be tempting to buy high and sell higher, that kind of mindset is what caused the crash in the first place. Getting involved in record-breaking deals might earn you a place in the hall of shame rather than a spot on the Wall Street A-Team.
In an expensive market, what can the private equity manager do?
According to the private equity leaders at Bain, private equity professionals have to dig deeper than ever before by networking extensively with their industry contacts. The due diligence process must become even more rigorous. One has to be on the lookout for “hidden traps” – details that can sabotage entire deals. Likewise, the manager must have a keen eye for “buried treasure” – details that can turn a mediocre deal into the capstone of the firm.
