Overview of the Corporate Debt Maket of Past Twelve Months

Altoona state investment board: December 2008

Yi Wang

The head of Altoona state investment board has to decide how to handle the €100 million investment that had been made to the fourth fund of Permira. Altoona has faced the dilemma about whether to accept the punitive offers Permira gave.

In order to make a reasonable decision, Altoona need to address three factors. Firstly, is this offer valuable in current environment? Secondly, how much Altoona need to give up by accepting this offer? Lastly, the approximate cost of accepting this offer. I think we can considerate this problem according to three factors: the fund company and industry environment, the current situation of Altoona state investment and the evaluation of the offer Permira gave to.

As we all know that private equity industry is a risky industry. Although Permira has already achieved big success in its prior funds, it is still hard to guess the performance of next fund and the eventual returns form the 2006 vintage private equity funds is still unmeasurable. Currently, the market environment seems a replay of busts. There are many signs in the market. Firstly, the availability of debt from the transaction has fell significantly. Secondly, bank’s lending to private equity sponsor also suffered a big decrease. Thirdly, the debt preceded the equity stakes in eventual repayment and the risky part did not win a good return that investor in a buyout find should receive.

In addition, Altoona is also in a bad situation. Altoona has suffered a continue loss of public equity and hedge funds. The share of its holdings devote to private equity has increased from 5 percent to 8 percent. That suggest that Altoona do not have the strong ability to tolerate the risk at this time.

Then look at the offer. One observer said it is an incredibly clever deal which allowed all sides come sort of positive. It contains four rules:

LPs could reduce their commitment to 60 percent of the ordinal amount.