Nassim Taleb Says Stock Rout Threatens Private-Equity Firms

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Taleb Says Stock Rout Threatens Private-Equity Firms (Update1)
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By Thomas R. Keene and Eric Martin

Jan. 28 (Bloomberg) -- Private-equity firms may follow banks into failure should U.S. stocks extend their worst rout since the Great Depression, said Nassim Nicholas Taleb, author of the best- selling finance book “The Black Swan.”

The industry uses borrowed money to make leveraged buyouts of companies, improves their operations and sells them back to public investors at a profit. Private-equity firms are facing the gravest crisis in their 40-year history after the credit bubble they helped inflate burst.

The Standard & Poor’s 500 Index has dropped 4.7 percent this year following a 38 percent plunge in 2008 that was the worst in 71 years. Blackstone Group LP, manager of the world’s largest buyout fund, fell 78 percent since the end of 2007.

“Banks are being bailed out, and private-equity firms are going to go next,” Taleb said in an interview with Bloomberg Radio. “These people in a bull market look like geniuses. And now they don’t look that intelligent, and it’s going to get a lot worse for them. If the S&P goes down 20 percent from here, what will happen to private equity firms? They’re all under water.”

As many as 40 of the biggest 100 buyout firms may collapse by 2011 as their debt-strapped assets default, according to a 2008 report by Boston Consulting Group Inc., which didn’t identify the firms in its study.

‘Highly Improbable’

The past year has seen a realignment of investment banking as Bear Stearns Cos. was forced into a sale and Lehman Brothers Holdings Inc. went bankrupt, prompting banks to hoard cash and depriving businesses and households of access to capital. Goldman Sachs Group Inc. and Morgan Stanley became Federal Reserve- supported bank holding companies.

Rare and unforeseen events are known as “black swans,” after Taleb’s book, “The Black Swan: The Impact of the Highly Improbable.” It was published in May 2007, about three months before the credit crunch rocked global markets and led banks to announce more than $1 trillion of asset writedowns and credit losses.

As the founder of New York-based Empirica LLC, a hedge-fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to bullet-proof investors from market blowups while profiting from big rallies.

To contact the reporters on this story: Thomas R. Keene in New York at tkeene@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net
Last Updated: January 28, 2009 10:16 EST