Posts Tagged ‘private equity’

More Chinese and Middle Eastern money heading Down Under: recipe for inflation?

Saturday, December 23rd, 2006

In our previous article, Awash with cash?what to do with it?, we asked the question of where the vast amount of surplus US dollars reserves (from China and the oil-producing Middle Eastern nations) will be recycled to.

Today, this news article caught our eye: The rush is on, the ride is wild. From this article, we learnt that according to the ANZ chief economist Saul Eslake, the private equity boom (we are more inclined to call it a ?bubble?) is funded by ?an absolute flood of money coming out of Asia and the Middle East. There is a huge amount of money looking for homes, and some is going to risky areas.?

It is forecasted that in Australia, the pace of takeover and leveraged buy-out activities by private equity will accelerate in 2007. We can imagine that with more flood of liquidity (money) heading for Down Under, we can expect price inflation to become more of a problem as these money permeate to the rest of the economy (see our article, Cause of inflation: Shanghai bubble case study, for our discussion on the Austrian School?s view on inflation).

The world is still flooded with too much liquidity (money). Just like in 1929…

Are pirate (oops, we mean ?private?) equity getting reckless?

Thursday, November 23rd, 2006

Yesterday, news of Qantas (the Aussie national icon) being stalked by private equity electrified the Aussie market. At one point, fuelled by rumours that a takeover deal could be worth up to $5.50, Qantas shares shot up to a high of $5.25.

We are simply amazed at the audacity of private equity nowadays. It seems that no public companies are safe from these marauding hordes. Do they want to take over Qantas just to prove that they can?

As we said before in Qantas rose on takeover rumour, there are substantial legal and political challenge for the takeover deal to succeed. To even contemplate such an endeavour, the share price of Qantas (before the release of the news) would have to be at such compellingly discounted level that the private equity can still offer a higher price that is economical. We doubt it is so for Qantas. We cannot understand what value these private equity see in Qantas at such an exorbitant price. Why would they even want to bother to borrow so much money (note: debt increase the risks further) to go through so much trouble and risks for so little? We scratch our heads in wonder. Perhaps these deals are structured to benefit the CEO, directors and fee-chargers (read: Macquarie Bank) much more than shareholders and investors? If the deal succeeds, we can imagine Qantas being slashed, burned and plundered mercilessly in order for this daring adventure to be worthwhile for the pirates.

It looks to us that this year?s rise of the private equity phenomena could be an indication that the world is still sloshing with too much liquidity (money and credit). Private equity siphon up a lot of debt and its easy availability may lead to situations where lenders underestimated the risks. As this article said,

WESTPAC’S David Morgan last week urged caution about the torrent of private equity deals, saying the inflated asset values, highly geared takeovers and rising interests rates paralleled the boom and bust conditions of the 1980s. What is unclear about the debt-fuelled private equity bubble, however, is who will be left wearing the losses when it ends.

Indeed, financial regulators around the world are getting concerned. As this article mentioned,

THE collapse of a large buyout firm was “inevitable” and could threaten the stability of the British economy, Britain’s main financial watchdog has warned as it becomes the latest international regulator to focus on the private equity industry.

As investors, we take heed of this phenomenon as a warning.

Qantas rose on takeover rumour

Wednesday, November 8th, 2006

Yesterday, as reported by the Australian Financial Review (AFR), there were rumours of Qantas being a takeover target. Consequently, the share price shot up from $4.20 to $4.31. At one point, speculators were trading Qantas shares at the record high of $4.36.

We marvelled at the foolhardiness of the speculators who, based on this gossip, rushed to buy Qantas shares. Anyone who knows what they are doing will know that it is highly unlikely that Qantas will be taken over. Firstly, the law forbid any foreigners from owning more than 25 per cent of Qantas and all foreigners can hold a total of only 49 per cent of it. Secondly, we doubt there is any good value for Qantas shares at this level of price.

Needless to say, if any private equity company wants to buy up our holding of Qantas shares, we will gladly sell it to them.