Private Equity Industry Glory Days May Be in Past

With buyout firms posting multimillion-dollar losses and failing to meet lenders' calls for collateral, experts say the private equity industry has seen the last of its glory days.

Yesterday, one of the industry's biggest players, Blackstone Group, announced steep losses for the fourth quarter. The news came on the heels of problems with another large player, troubled mortgage investment fund, Carlyle Capital. "The faucet has been shut off," an equity strategist at the institutional trading firm Miller Tabac + Co., Peter Boockvar, said. A lot of these firms "can no longer borrow enough to buy companies. They're just sitting on their own money because they can't get the lending terms" they need to invest.

Since going public in June, Blackstone has watched its shares plummet 53% as its key business activity — leveraged buyouts — halt amid the credit crunch, with shares closing yesterday at $14.11 from $31 at its IPO. Blackstone's revenue has declined to $345 million from $1.28 billion just a year ago.

With unfavorable market conditions expected to persist for the rest of the year, Blackstone's chief operating officer, Hamilton James, said he expects that the firm's financial situation will not improve until 2009.

Meanwhile, turmoil in the credit market is also engulfing the Carlyle Capital Corp., which yesterday asked its lenders to prevent the liquidation of $16 billion in collateral securities until they complete negotiations on plans to repay the debt.

A heavily leveraged investment fund, Carlyle Capital last week missed margin calls, or demands by lending banks to post additional collateral, on its $21.7 billion portfolio of residential mortgage-backed bonds. The fund had borrowed more than 30 times the value of its $670 million equity to invest $21.7 billion into those AAA-rated mortgage-backed-securities, which were issued by the government home loan agencies Freddie Mac and Fannie Mae.

Shortly after announcing it had missed the margin calls from four lenders last week, Carlyle Capital's stocks plummeted nearly 60%, to $5, before trading was suspended. The fund's parent company, the Carlyle Group, has extended a $150 million line of credit, but experts warned that the prospect of insolvency for Carlyle's investment fund persists.

The banks have "taken on way too much risk by allowing Carlyle so much leverage," the founder of the investment-advisory firm Alpha Capital Management, Brad Alford, said. If liquidity keeps drying up, "firms like Carlyle will keep getting hit by a tidal wave of problems."