JPMorgan's Blutt Says a Third of LBO Firms May Shut
Bloomberg, 1/18/2002

Philadelphia, Jan. 18 (Bloomberg) -- Buyout firms made so many money-losing investments in 1999 and 2000 that as many as a third of the companies may go out of business by 2007, according to an executive at J.P. Morgan Chase & Co.'s private-equity unit.

``A lot of private-equity firms are going out of business right now,'' Mitchell Blutt, executive partner with JPMorgan Partners, said at a private equity conference at the University of Pennsylvania's Wharton School. ``We have not seen something of this magnitude ever.''

About 30 to 35 percent of firms will shut by 2007, said Blutt, whose firm invested about $1.5 billion in 2001, down from $3 billion in 2000. JPMorgan Partners, the second-largest private equity investor with about $25 billion of assets, this week reported its fifth loss in six quarters.

Private-equity firms, with combined capital of about $250 billion of capital, are unlikely to increase investments or boost returns this year because bank financing is scarce and many firms must still spend time and money trying to salvage their existing holdings, buyout executives said at the conference.

For transactions to pick up, corporate earnings must deteriorate to the point where some companies' executives are ``in extremis'' and seek a reorganization or a sale, Stephen Schwarzman, president and chief executive officer of Blackstone Group, said in a speech.

``We are really reaching a bottom,'' said Schwarzman, whose firm is raising a fund that may top the industry record of $6.1 billion. ``The leverage available from banks is in the relatively pathetic stage.''

Buyout volume fell to $23 billion in 2001 from $41 billion in 2000 and $63 billion in 1999 as returns fell to record lows and firms wrestled with money-losing technology and telecommunications investments.

JPMorgan Partners lost $1.2 billion in 2001, compared with profit of $988 million in 2000 and $3.14 billion in 1999. The company's investments include stakes in packaging products maker Pliant Corp., retailer Guitar Center Inc. and online flower delivery shop 1-800-Flowers.com Inc.

Mellon Ventures Inc., a unit of Mellon Financial Corp., saw spending drop to $200 million in 2001, from $400 million in 2000, though it hopes to increase investments by one-third this year, said Larry Mock, president. Follow-up investments in existing holdings accounted for 80 percent of Mellon's transactions in 2001, up from 15 percent in 2000.

Private-equity firms have capital to spend, though there aren't enough deals, said James Perry, managing director of Madison Dearborn Partners. The firm recently competed with 24 other firms for a $200 million investment, he said.

``That's going to bring returns down,'' he said.

Paula Chester, who helps manage $15 billion in private equity and other alternative investments for the $115 billion New York State Common Retirement Fund, said buyout firms moved from investing in movie theaters to yellow pages publishers, to insurance companies. ``You guys go in herds,'' she said.

For now, firms will sit on their wallets, said Schwarzman.

``This is just batting practice now,'' he said.

--Randy Whitestone in Philadelphia through the New York newsroom (212) 318-2300 or Rwhitestone@Bloomberg.net. Editor: Serafino.

© 2002, Bloomberg, L. P.