Private equity firms have been going overboard with acquisitions and takeovers recently, and it just isn't sustainable. The private equity industry has been buying more and more companies for higher and higher prices, and PE firms are running out of things to hurl their money at. Remember the dot-com bubble? People throwing cash at companies that, when actually looking at performance, weren't that great? Private equity's dangerously close to heading in the same direction. They've been buying up companies left and right, but at seriously inflated prices. This has been made possible by the tons of easy money made available by investment banks, institutional investors and others. Now that the credit markets have finally tightened, it will be much more difficult for private equity firms to fund good deals let alone justify ridiculous P.E. ratios.
Meanwhile, the investment banks are already struggling, especially Goldman Sachs. Though virtuallyall of the major investment banks have been unable to resist the allure of private equity, Goldman dove in particularly eagerly. Alternative assets (read: private equity and hedge funds) make up 21% of Goldman's total assets under management; Bear Stearns Companies (BSC) has the next largest percentage, with alternative assets composing 15% of its AUM. Goldman is involved with private equity in pretty much every way possible, from underwriting equities and debt to representing the company being acquired. The company doesn't provide many details about its private equity ventures, but as of July 2006, it was estimated that PE contributed 8% to Goldman's Q2 2006 pre-tax earnings, a substantial amount.
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