March 1, 2007
Private Equity Tactics
Private Equity shops are primarily known for their ability to take public equity markets (or unwieldy conglomerates) in one hand and squeeze the coal out of them to create diamonds, while in the other hand, taking the leveraged loan market and squeezing it to get super-low cost debt financing out of it, and then riding off into the Billionaire Sunset…or onto their mega-yachts. But sometimes their tactics are much more base and straightforward than spotting a good deal and getting it done.
Witness TXU. How did Kravis Kohlberg Roberts and Texas Pacific Group get their TXU (NYSE: TXU) strategy done? With low cost guerrilla tactics as outlined below.
Step 1: Find a public company to take private that would be a viable member of Satan’s Portfolio due to a combination of its not politically correct products and its current disfavor with public sentiment. In this case, power company TXU, with its plan to build up to 11 new coal power plans (of which less than a handful had a realistic chance of happening) and to raise prices to the levels commensurate with the demand for electricity was a cruel and horrible agent against Mother Nature and the working class. A natural target.
Step 2: Hire “performance artists” thugs and hooligans to protest against this company for reasons of social justice or the environment or racism against robots or whatever is popular today. In this case, the hired hands staged a “die-in” in front of the offices of the largest mutual fund holders of TXU stock, which coerced these companies to reduce or terminate their exposure to TXU creating downward pressure on the stock price. For those not in the know, a “die-in” is where you simulate death as a form of protest. Think low budget live versions of television anti-drug and anti-smoking scare ads which have been trotted out for the past 20 years.
Step 3: Buy the company at the reduced level created by the protesting campaign you bankrolled on the sly.
Step 4: Ride off into the sunset on your mega-yachts.