Reply #13: Do equity firms drain companies?

[RawMaterials]

Paper reports buyout firms are saddling their purchases with debt to pay for lavish dividends.

The Wall Street Journal, citing statistics from Standard & Poor's, reported Thursday that in the past two years, private-equity firms have paid themselves more than $50 billion from so-called dividend recapitalizations of the companies they acquired. Such dividend financings were virtually unknown just five years ago, according to the paper.

It also reported that calculations by some private-equity firms show that as much as 50 percent of the returns that buyout firms have paid their investors in the past two years came from such dividends, which were financed mostly with new debt.

In the past, private equity firms made their money by restructuring the companies they purchased and then either taking them public or selling them to cash out their investment. But they are now seeing quicker returns through the cash payments that match or top their original equity investment while they still own the firms, according to the report.


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Some private equity firms are cashing out even quicker than that. The paper reports that the four firms that bought satellite operator Intelsat in 2005 -- Apax Partners Inc., Apollo Management, Madison Dearborn Partners and Permira Advisers -- paid themselves a $350 million dividend financed with newly issued Intelsat debt almost immediately after the deal closed.

Some critics told the paper they are worried that the companies being acquired by the private equity firms could fail due to the enormous debt being assumed. Should it "be about how far you can push things or should it be about how much flexibility you give your companies to deal with the unexpected? You can see reason to worry in how much they are pulling out," Josh Lerner, a professor at Harvard Business School who has done research on the performance of private-equity firms, told the paper.

http://money.cnn.com/2006/01/05/news/companies/private_equity_dividends/index.htm