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Sloan Sessions: A year of private equity

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SCOTT JAGOW: Newsweek’s Allan Sloan joins us for a look back at the year on Wall Street. It can pretty much be summed up in two words: private equity. Allan, you agree with that?

ALLAN SLOAN: Yeah, that and the other two words: hedge fund. Right. 2006 has been all about private equity buying everything in sight and some things that aren’t in sight and going overseas and hedge funds playing a role actually in many ways supporting private equity. By helping put companies in play, by buying securities, or securities hell, by buying junk bonds that private equity firms issue as part of their takeovers. This has been the year of money sloshing around Wall Street like you can’t believe.

JAGOW: How does this compare to say the dot-com boom of the late ’90s?

SLOAN: This really in many ways is like the dot-com boom of the ’90s, except that the people doing it generally have been around a lot longer than the dot-com people. But I think it’s going to come also to a bad end the way dot-com did, but not as spectacularly. I mean private equity isn’t going to blow up like that, especially since unlike the dot-com which were all in stock markets so you could see, right? You could see what was happening, there were price quotes. The private equity stuff a lot of it is private. But this can’t go on. But it’s a lot of fun to watch while it lasts.

JAGOW: Well why can’t this keep going? What’s to stop it?

SLOAN: If you project that the growth in private equity for 2007 is the same as it’s been this year, private equity would have to do $5 trillion of transactions in 2007 and then $10 or $12 trillion in 2008. There’s just not that much around to buy. I mean, it can’t go on this way because if it goes on this way, you get to a point where private equity owns the Earth.

JAGOW: Well if private equity owned the Earth, we wouldn’t have stock exchanges anymore would we?

SLOAN: Well that’s right. And if private equity owned the Earth, how would they take these things public to get their money out? You need to have a stock market because they need an exit vehicle. You have this thing called private equity which is a fancy name really for leveraged buyouts and then they call it private but just about the first thing they do if they hit it right, is take the thing they own public so they can get their money out, pay investors a return and get their piece of the action because LBO funds don’t get their cut of the action until the investors have actually gotten their hands on their profits.

JAGOW: Well Allan it’s been a fun year with you and I look forward to another year of you on Marketplace. Happy New Year.

SLOAN: And happy New Year to you and to the audience and in a year we’ll be talking about different things, I hope.

JAGOW: Allan Sloan is the Wall Street editor for Newsweek magazine. In Los Angeles, I’m Scott Jagow. Thanks for listening and happy New Year.

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