Private equity lessons

August 27 - Financial Times - Runaway booms always mask a raft of questionable activities. The buy-out frenzy was no exception. Problems being exposed by the credit market crunch go beyond the exuberant funding promises that the banks now regret. Home Depot’s renegotiation underlines a few of them.

First, there is “stapled finance”. The idea was that banks advising on a sale would also offer financing terms to potential buyers to lubricate the process. That created a conflict of interest by positioning the bank alongside both buyer and seller. In Home Depot’s case, Lehman Brothers advised on selling the supply division, helped provide the financing and then, when the deal looked tenuous, helped to force a renegotiation and price cut. At that point, it was removed as an adviser. But it should never have been on both sides. In a tight spot, the interests of its shareholders were always going to come above Home Depot’s. Read More (subscription required).