What happens in Degas stays in Degas aptly describes Edgar Degas mastery and monopoly of the painting of nineteenth century ballet dancers, of which he produced over 1500 paintings. Private equity, albeit much less talented with an easel, feels compelled to also produce creative keepsakes of each investment. Rather than encase the mementos in amber, lucite has become the formaldehyde of finance. The combined creative juices of investors and bankers have compressed lucite into all conceivable geometric forms, from the traditional cube to tetrahedrons to plastic buckyballs. Cocooned in each of these lucite tchotchkes is an artifact of the investment. The early simple lucite mementos were called tombstones as they contained a page from a legal document from the transaction and greatly resembled what one would see on Boot Hill. Simple tombstones sufficed for many years. As molding of acrylic became more sophisticated, the ability to suspend objects in the lucite triggered the imagination of the associates charged with creating the deal toys.
On the shelves of our conference rooms lie the plastic record of our firm’s decades of private equity investing. Near the front of the shelves and regularly dusted, are the investments we mention at cocktail parties. At the back of the shelves, the flotsam and jetsam of the decades sit. The creative range of the contents suspended or etched into the tombstones is wonderful. Various tombstones contain currency that range from dollar bills to pennies and in one case doubloons. Etched into a few are three-dimensional sylvan balloons. Replica hamburgers and tacos make an appearance. Over the road trucks and construction equipment roll into view. Pet carriers and kids’ toys playfully appear. Shadowbox scenes of crowds and exercise studios jump into view. Medical products like drug ampules and lawn sprinkler heads are embedded forever in acrylic.
Once all the mementos have been catalogued the business of investing takes center stage. Adding leverage to the system continues to be the strategic objective of many. In the 1990’s, credit lines appeared as the first foray into additional leverage. Short holding periods gradually extended into much longer periods as the IRR benefits were sought by some limited partners. As the liquidity crisis of the last few years grew, NAV loans secured by the portfolio equity were offered to create distributions by adding additional leverage. A new product, also secured by the portfolio equity has now emerged; portfolio backed loans that are offered to the portfolio companies at a lower rate than an individual company would command, but with the increased the risk of cross collateralizing multi-company debt. This product is being offered to alleviate the burden of higher interest rates of 2024 versus that of 2021. Ironically, the LBO business came into existence in the 1980’s and 1990’s when rates, at times, were more than double what they are today, so the fear that operating with today’s rates seems exaggerated. Putting the entire portfolio at risk by cross collateralization seems far riskier than a sensible purchase price or a hedge.
I’m Rob Morris and I approved this blog.