Monday, June 11, 2007

More Proof That Private Equity Is "Frothy"

hat tip to Room305 from the
UK banks are taking the unprecedented step of lending to the private equity and hedge fund sector at below the official UK interest rate.

Experts said it was a sign of City institutions' growing desperation to buy into the booming alternative investments market.For the first time since comparable records began, the loans from banks to non-bank financial institutions are being charged at below the base rate, according to figures published by the Bank of England.....

The Bank said the rate at which banks lent to financial institutions outside the banking sector - which is dominated by private equity and hedge funds - dropped to 5.24pc in April, below the then base rate of 5.25pc.

The rate is even further below LIBOR - the London Interbank overnight rate, which measures how much money in the wider markets costs - of 5.58pc.
The phenomenon is known to be of concern to the Bank of England, which fears the wide availability of cheap money could contribute to higher inflation. It has said that the statistics may also reflect the fact that big banks are lending money to their subsidiaries at preferential rates.

here comes another eye opener via Regli

Archstone-Smith buyout a gigantic gamble: Barron's
Barron's said the buyout group is paying $60.75 a share for Archstone, or nearly $16 billion, and the company also has $6 billion of debt.
It said the buyers will borrow $17.1 billion to purchase the company and put up $5.1 billion of equity. But Barron's said the interest tab on the $17 billion of debt could top $1 billion, exceeding net operating income this year, which may total $800 million. A sale of assets might not cover the shortfall, the article said.
disclosure: short reits (index)

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Anonymous ilanit said...

Los Angeles private equity firms borrow new money into existence in order to take these companies private. They inflate the money supply and syphon off huge sums as personal compensation. All the while, the cost of everything goes up as the value of a dollar goes down.

4:59 AM  

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