With 10-year bond yields dipping back under 5% last night, Wesfarmers might prove lucky with its timing in taking over Coles just when the private equiteers found money a little harder to come by.

Like autumn leaves, the equiteers fell away one after another from Coles as the cost of their borrowings rose, leaving Wesfarmers the only bidder.

It looked like confirmation of the sharp spray the swarm copped from GE’s CEO, Jeff Immelt, questioning whether they really have the management ability to make a go of leveraged buyouts now that money isn’t quite so cheap:

If you think about the last five years, private equity funds could buy things cheap, do zero operational improvements, strip things out, add leverage and float the business. Interest rates were 1 per cent, now they are 5 per cent… If you are buying today, you are ponying up. You are paying top dollar. It is a different ball game now.

And the private equiteers are facing attacks on various aspects of their favourable tax treatment in both the US and UK. Thank heavens there’s still Pete Costello to give them a good laugh.

Pete was at it again on Sunday, reports Reuters:

The government wanted to ensure private equity firms were not using high leverage and high borrowing simply to minimise tax, Costello said in an interview with Sky News, aired on Sunday.

Australian financial regulators were looking at private equity funds in relation to leverage, corporate stability, stability in the financial system, and tax, he said.

Right. That’s the same Federal Treasurer who removed capital gains tax for foreign investors in non-real estate plays.

If a foreign private equiteer isn’t leveraging its investments so that the interest bill pretty well matched by the profit, the executives wouldn’t be getting their massive salaries. With the right structure, that means all the eventual profit can be taken as a capital gain and thanks very much Federal Treasurer.

The private equiteers’ glory days are far from over, but they have become more difficult. So far this week, there’s a US$49 billion Bell Canada takeover and Virgin Media is up for grabs at around 11.5 billion quid.

Both foreign and local equiteers still have plenty of equity being thrown at them to do deals, even if higher borrowing costs and wiser markets are making it tougher. As Immelt suggests, they really might have to display some management talent to add value rather than merely gear it up and strip it out.

Which leads one to wonder how CVC Capital Partners’ Adrian MacKenzie must be feeling as he reads Gerald Stone’s latest book and wonders just what he has paid top dollar for.

It certainly doesn’t look like management expertise.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey