Fed’s Zero Interest Windfall for Private Equity Firms

Thanks to the Federal Reserve’s ZIRP – or Zero Interest Rate Policy –

too-big-to-fail banks and private equity firms can,

in the words of Dire Straits, literally get money for nothing.

The politically-connected Carlyle Group, for example, has gobbled up companies.

Last fall, for example, Carlyle announced a $2.6 billion deal for Syniverse Technologies, a voice and data services provider for telecommunications companies.

Thanks to the Federal Reserve’s ZIRP – or Zero Interest Rate Policy –

too-big-to-fail banks and private equity firms can,

in the words of Dire Straits, literally get money for nothing.

The politically-connected Carlyle Group, for example, has gobbled up companies.

Last fall, for example, Carlyle announced a $2.6 billion deal for Syniverse Technologies, a voice and data services provider for telecommunications companies.

The same week, it completed a $3 billion takeover of CommScope, a maker of telecommunications equipment.

The deals highlighted how cheap corporate debt is fueling the recovery of the private-equity business.

While it remains difficult to get a mortgage to buy a home or to get a loan to finance a small business,

yield-starved investors are creating a robust market for corporate bonds and loans.

Private-equity firms are seizing upon the corporate-debt boom in myriad ways.

For the debt-heavy companies they already own,

industry leaders Carlyle and the Blackstone Group

are improving their balance sheets through aggressive refinancing.

Corporate loans are now available to do multibillion-dollar buyouts, too,

but the easy lending environment has created fierce competition for takeover targets, driving up prices.

Private equity’s outlook in 2010 was certainly brighter today than the year before.

Buyout firms made deals last year up 95 percent from the previous one, according to data from Thomson Reuters.

Blackstone’s earnings report underscored just how favorable the environment has become.

The firm, based in New York, with $119 billion in assets under management, said its

profits were bolstered by sharp increases in the value of its real estate holdings.

More than 50 percent of the debt carried by Blackstone companies

has either been refinanced at a lower cost or modified with better terms, a spokesman said.

Carlyle, meanwhile, which is based in Washington and whose public face is David M. Rubenstein,

is proving that it is unafraid to pay a high price for companies.

The buyout firm’s $31-a-share bid for Syniverse was 45 percent higher than the company’s average closing price for the previous 30 days.

Its $31.50-a-share offer for CommScope, meanwhile, was 39 percent higher than the company’s 30-day average stock price at the time.

Both Carlyle and Blackstone have billions of dollars in investor capital to put to work.

Blackstone has invested more than $7.2 billion of investor capital in private equity and real estate deals since the fourth quarter of 2009,

though it announced only one major buyout through the fall of 2010:

the $4.7 billion takeover of Dynegy, whose purchase price includes the assumption of the energy company’s debt.

Carlyle had invested about $5.8 billion in private equity and real estate through the third quarter of 2010,

more than the $5.2 billion it spent in all of 2009 —

a figure that doesn’t include the Syniverse and CommScope deals.

The firm was behind four of the biggest leveraged buyouts announced last year,

including those of Syniverse, CommScope, the vitamin maker NBTY, and the Australian hospital operator Healthscope.

Traditionally, Carlyle is not shy about bidding.

In his annual e-mail to employees, William E. Conway Jr., a founder and the firm’s investment chief,

hinted that it was O.K. to pay up for good businesses.

“Of course higher quality assets are never cheap and may initially model at a lower expected” return,

he wrote in the message, which was sent in February.

“I believe the actual returns will exceed the model returns on these high-quality transactions.

The decision to do the deal (or not) will always trump the impact of the final price negotiation.

If you do great deals, you will get great results.”

Historically, Blackstone has been more averse to pay a premium for its deals,

though it did on the buyouts of Equity Office Properties Trust and Hilton Hotels during the equity bubble of 2006 and 2007.

While they may differ on buyout opportunities,

Blackstone and Carlyle share several investments 

they are preparing to take public, including the media company Nielsen.

The two firms also joined forces in April 2009 to buy Bank United, an ailing Florida lender.

By last fall, the bank’s results had stabilized and

the firms prepared an initial public offering to raise $500 million

that the bank will use to expand into New York and other locations.

Still, the same two firms have suffered the effects of getting caught up in last decade’s leveraged buyout binge.

Blackstone and Carlyle teamed up with two other firms to buy Freescale Semiconductor for $17.6 billion in 2006.

Soon after, the chip market collapsed and the deal was widely denounced, according to this item in the New York Times.

Even so, with the Fed literally giving money away to private equity firms and TBTF banks,

it’s hardly surprising the finance sector is singing the praises of the ZIRP that has rewarded them so handsomely.