Vanity Fair on PE as the Ultimate Bubble
Overall, I don’t recommend this article– not very well researched at all.
“So … who’s on the brink?”
“Carlyle,” he responded darkly. Indeed, Carlyle Capital Corporation, the arm of the Carlyle Group that invests in mortgage-backed securities, had defaulted last spring on more than $16 billion.
The question is HOW do private equity firms go out of business? What are the steps that happen? The same can be asked about VC firms. It’s not as easy as hedge funds, where redemptions can shut a firm down.
The writer also fails to recognize that fair value has indeed entered the realm of private equity. While some firms are reporting their holdings at fair value, the deadline to comply is the end of ’08.
The precariousness of it all is obvious to every private-equity manager—which is why they see their competitors imminently going down. One big front-page bankruptcy of a P.E.-owned company—say, Hilton, or the commercial-property company Blackstone bought from Sam Zell (enabling him to buy the Chicago Tribune, which has gone bust)—will create new demands for, and congressional oversight committees insisting on, fair accounting treatment for portfolio value. If the value of the private-equity market is re-stated like the value of the stock market (its mirror image), a reasonable panic ensues—Carlyle loses its $40 billion and everybody else can’t get at what they themselves have got on call.
http://www.vanityfair.com/politics/features/2009/02/wolff200902