Wheres the beef?

Size, it seems, is everything. It’s all well and good for private equity firms to gang up and bid double digit billions to take companies private, but does this set a positive precedent for the private equity industry?

If nothing else, the US$11.3bn bid for SunGard definitively confirmed the trend towards ballsier buyout trades. The seven-strong group of private equity firms that put in the winning bid have their moment in the sun, but that won’t last long: the bidding situation for Wind will result in an even bigger result, and people are now focusing on US$20bn as the next horizon for the buyout market.

But doesn’t the very notion of multiple firms bidding jointly for assets undermine one of the purportedly core tenets of value investing: i.e. the ability to influence the evolution of portfolio companies in order to nurture their growth and development and ultimately deliver superior investment returns?

Private equity firms pride themselves on the skill sets their partners possess in this regard. How can this entrepreneurialism possibly manifest itself in what is ultimately a decision-by-committee situation? Making decisions with seven financial investors around the table is likely to be problematic. The likelihood of everyone agreeing on strategic considerations is at best remote.

Size is definitely an issue here. The ability to influence growth companies through superior management and ideas is one thing. The ability to do the same with a company that is already best-of-breed in its segment and which already generates US$3bn in revenue is altogether another.

The real question is: what can seven albeit world-leading private equity firms deliver vis-à-vis SunGard in the private sphere what real-money investors and current management couldn’t deliver in the public market? That remains to be seen.

Double-digit billion dollar trades are pushing the capacity of the private equity industry to the limit. Sure, there’s a lot of uninvested cash out there, and competition for assets is fierce, but what options do the new owners have to super-charge growth at SunGard, or Wind, or any other biddable asset?

A transformational corporate merger of equals is likely to be out of the range of the private equity industry. Anything along these lines will surely be done via an all-stock deal, or in the syndicated bank market, which has an infinitely bigger capacity to finance corporate event activity than the private equity industry – and at significantly finer margins.

SunGard can make accretive acquisitions that will generate growth. But it’s already doing that. The owners can break the company up and play the sum-of-the-parts game. But that’s what hedge funds are supposed to do.

The truth is that committee transactions do nothing but commoditise private equity investment. They deny LPs the kind of portfolio diversification they require and over-expose them to single-name credit risk. Put bluntly: if SunGard doesn’t deliver the kind of returns that the buyers clearly believe it will, the outcome is going to be pretty binary.

If private equity buyers are going to behave like real-money players or hedge funds, isn’t is better to put your money with real-money funds or hedge funds?