Taleb Foresees Private Equity Firm Failures If Stock Market Falls

Nassim Nicholas Taleb of Black Swan fame predicts that a stock market decline of 20% would take down a lot of private equity firms along with it. Note that Nouriel Roubini predicted a fall of that level when stocks were a tad lower than today.

The grim view is confirmed by a BCG study that said that many P/E firms could fail as their portfolio companies defaulted.

If this were to come to pass, it’s a no-brainer to think the firm’s principals would be in the dole queue for bailout money.

From 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 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.

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  1. Anonymous

    This is not really germane, but Taleb’s continuing need to insist that he’s the only smart person in the world is completely juvenile. I liked his books, but I think I’d find it hard not to throw a drink in his face in person — and I’m largely in agreement with him…

  2. Mara

    Having read 2 of Taleb’s books I can see what Anon@1223 says about Taleb’s “I told you so” tone he sometimes has. However he does have good data and it’s changed my viewpoint on trading.
    If you’re not in with any pvt equity group, well where do you go? He runs a fund, but I’ve not seen any data on his past performance or the kinds of instruments he prefers. Anyone know about this? Once I saw data on Peter Schiff’s “I told you so” talk vs the lousy recent returns on EuroPacific, I decided to ignore him since he couldn’t manage to preserve his clients’ capital first and foremost. I reckon when we hear from “gurus” we should make sure they’re making more on their portfolios rather than their book sales.
    @Michael Fiorillo – I would volunteer to play Taps at the death of Carlyle and Blackstone. Bonus if you could throw in Haliburton.

  3. Anonymous

    Since the PE funds have been buying up senior loans of their portfolio companies, why would the PE management companies or the investors in those debt funds be hurt if the portfolio companies stock or subordinate debt was wiped out?

  4. Richard Smith

    Well, he is exceedingly bumptious, Anon of 12:23. It’s a mindset that goes well with defiance of conventional wisdom (and it typically grows even more insufferable when confirmed by events).

    You sound too demure for drinks throwing, but maybe one dsy there will be a video of your meeting with Mr T. I look forward to it.

  5. Anonymous

    Anonymous said…

    “This is not really germane, but Taleb’s continuing need to insist that he’s the only smart person in the world is completely juvenile.”

    Well, when you get him in a room full of economists, he IS the only smart one in the room!

  6. ruetheday

    Private equity firms are already in line for a big tax break via this bill:


    How anyone could argue that these firms are systemically important and thus deserving of a taxpayer bailout is beyond me, however. They’re effectively just holding companies. If the subsidiaries they own go bust, so what. Yes, they’re highly leveraged, but again, so what. Is there some sort of unwritten rule that bondholders (in any entity) can never take a loss?

  7. Waldo

    This financial sector’s quasi-collapse is like a chess game. Oil (with military and market manipulation) made the first move deep into the free market (capitalism’s) group. But now the free market (selling-off of equities [Euro power]) is pushing back into the scattered pawns of the oil tyrants.

    The game will be complete when finance (sell-off power) topples the king (George H.W. Bush) with prison time (no pardon from Obama or his whole legacy is capoot!).

    This may seem juvenile but for our future’s sake we had better believe in Walt Disney’s imagination just this once.

    The “weeds” (Europe) are outperforming the beautiful “lilies” (America). It stinks here in the states!

    Sonnet #94

    They that have pow’r to hurt and will do none,
    That do not do the thing they most do show,
    Who, moving others, are themselves as stone,
    Unmoved, cold, and to temptation slow;
    They rightly do inherit Heaven’s Graces
    And husband nature’s riches from expense;
    They are the lords and owners of their faces,
    Others but stewards of their excellence.
    The summer’s flow’r is to the summer sweet,
    Though to itself it only live and die;
    But if that flow’r with base infection meet,
    The basest weed outbraves his dignity:
    For sweetest things turn sourest by their deeds;
    Lilies that fester smell far worse than weeds.

    William Shakespeare

  8. Milosz

    For a long article about Taleb's trading before he started his latest hedge fund called Universa, go to this New Yorker article:

    For a youtube detailing the performance of Universa last fall check this out:

    Yes, he obnoxious and he is not a good speaker, but by God is he right! He is right about economics/finance being too complex to prognosticate like all the economists/risk managers want and like to do.

    Essentially what he is saying is that we should view economics the way the military views wars;
    – Make lots of contingency plans,
    – Be prepared to throw your plans out the window in the first day of "war"
    – Etc. …

    I am so disappointed that Obama's new economics team (Geithner & Summers) don't get the simple message that Taleb is preaching. And it makes me very worried about what they'll eventually decide to do.

  9. dailybail

    Yves, Here is the lead for my newest piece which is now up. Thought you and your readers might enjoy the swipe i take at a certain group of economists. I’m obviously close to losing control of myself at this point. Someone hold me back.


    “In this melancholy afternoon edition of bailout news links, our attention turns to the Obama stimulus package. Oustside of being an insane waste of another trillion of your children’s future, there is some value here. There’s word that we might have some nifty parking garages built at the Orange Bowl in Miami, plus there’s $350 million earmarked for STD education. We’re all for public sex education here at dailybail. seriously. No Snark. But how many of these patronage projects will actually help the economy recover? None. Zip. Nada.

    Face it folks. Outside of the tax cuts, none of this will help. You neo-Krugmanites can kiss my ass. Keynesians, get the hell off my site. You add no value to the equation, beyond enteratinment for the rest of us, who are grounded in reality. Where is your grand, coherent vision for a vital infrastructure build out. It’s nothing but shovel ready projects of rank patronage. I thought Obama might somehow be different, but alas you and I and our children are being played for fools once again.

    Take a late day ride through hell, as we look at the 20 best reads on what’s going down.

    And today, Xanax is included.”


  10. JohnnyD

    I think Taleb should stick with randomness. It’s easy to pile on at this point, and extrapolate more horrendous happenings from what seems sure to come. I think I’ll get ready for a fat tail event that brings something wonderful.

  11. DailyBail

    and yves one more thing,

    you are hat tipped again several times. why, because you’re so damn good at what you do.


  12. NYCTrader Just write me here on this page , Ill email you

    Im also in the “Annoyed by Taleb” camp. His minor amount of celeb comes from publishing book with one opinion shared by almost every professional trader I know. I learned nothing from ‘Fooled by Randomness’ or the ‘Black Swan’ that I didnt get in my first year on Wall Street. He makes such a big deal about pointing out that guys get long and think they are geniuses.

    Well here is where Im at: Nobody is a genius. You may have turned the corner and insolated yourself by piling up a few dollars, but no one with a real fortune has done it without breaking a few laws and cutting a few corners. And people who get long any one asset? (CDOs, Private equity, real estate, etc) I didnt learn from Taleb that they are just hopeful big-trade front runners who all get taken down over time.

  13. Michael S

    Yes, but to anyone who isn’t a trader and was amazed at how much money was generated in the markets, Taleb shined the spotlight on all the bullshit.

    He has gone a fair way to expose all the charlatans, and it was a charade that had people tacitly accept that what Wall Street cronies were getting paid was reasonable.

    The only problem with Taleb is that his arrogance and lofty thoughts prevents his message from being spread more widely.

  14. Anonymous

    “The greater the smile, the easier it is to lie.”

    Keep that in mind whenever someone offers to run your money for you.


  15. Viv

    According to what I’ve read and heard from his interviews Taleb was up between 50-100% in the last year. So his performance was brilliant.

    His books are brilliant and the economy is going to enter the greatest depression. This credit bubble was the longest and largest in history, starting from 1982. Hence the contraction will be long and deep. Every action has an opposite and equal reaction. The economy will only right itself when all the bad debts are washed away through repayment or default.

    And there is so much toxic debt out there that righting the economy will take a decade or more of painful correction.

    The correction is always equal and opposite to the deception that preceded it. Obama’s spending spree will only add to the debt burden making things much, much worse.

  16. Michael S


    The message doesn’t change, but it is interesting to read people’s perceptions.

    I remember watching with a friend a segment he shared with two staid economists from the IMF. They were putting precise figures on global growth and their outlooks, while he was exasperated with them and when pressed claimed he couldn’t possibly know what the exact growth would be.

    By contrast, their calm, conservative wisdom seemed more reassuring and believable than his frustrated uncertainty, even though you knew that the IMF guys had no freaking clue what was going to happen.

  17. Abbott_Of_Iona



    Inflation in the US in 2010 @ 8%
    Inflation in the US in 2011 @ 10%
    Inflation in the US in 2012 @ 12%
    etc. etc. etc.

    Nothing Taleb,or anybody , says can change what Obama is doing.

    Obama wants to “repair bridges” and build windmills?

    This sounds like the second quest of Don Quixote.


    This is insanity upon fascism.

    Building windmills to overcome the corruption of a gangrenous financial system by printing more money (and spending it on windmills).

    Are all of you insane.

    Wake up.

    It doesn’t matter where the money is spent (unless you are going to get a large part of it)

    You are headed for massive inflation. Your savings and pensions are being robbed

  18. horsefeathers

    History is replete with soothsayers
    and their imaginings. But the now
    is a confluence of adjustments
    and reconsiderings. The markets
    are a rickety scaffold. The
    bracing is all wrong.

    Private equity will surely take a
    hit. How could it not. Just more
    spokes in the Ponzi wheel.

  19. Anonymous

    Yep, 300 years of industrial revolution and the smart monkey thinks it has it down pat, pure human arrogance. Befoul the planet in so many ways, well of souls to be plucked by the musings of 2,000 years+ nomadic herders, meets rules of the universe.

    We defiantly have issues, we are just starting to have a window into the human mindset and yet we subject our selves to this kind of lunacy, the prognosis is not good, how much pain must we feel before we change course.

    The Universe does not care what we do, it has rules, which if ignored will bite us in the ass. We are just now getting a good picture of these rules and will not unlike a child, learning with out parental guidance, damage or kill our selves in the process.


  20. bg

    20% up or down in the market over 12 months sounds like a safe bet, and we might even get both.

    What I don’t understand is why LBO companies are systematically important in a debt deflation. If there is too much debt and too much capacity, it feels like one stop shopping for effective liquidation. In other words, there services are worth a positive amount with capicity is scarce and we want to put money to work, and they can find efficiencies. Their value and worth are negative now, so be it.

    Will the troth feed them as stimulus? because they are too connected and will bring others down with them? Because they are politically connected (Yves would use that French word ‘rich’)?

    Unless you think liquidation should stop completely, this the place that liquidation can create the fastest relief to the rest of the economy.

  21. Dan Duncan

    The people who read Taleb’s books and now gripe about his persona remind me of the teenage boys who were among the first to “discover” a particular rock band.

    Let’s call the band Metallica.

    Throughout these turbulent years of existing in the painful post-pubescent purgatory between boy and man, our teenager carved out a rough hewn identity listening to dark, angry menancing metal.

    He associates with other, like minded edgy souls on music’s cutting edge. He revels in the fact that his heroes are somewhat obscure—and that he is a gatekeeper of sorts. He can keep adults out of his world, and he can let other, potentially cool people in by saying, “Hey dude. You ever heard of Metallica? These guys ROCK!”

    But then…something happens…Metallica comes out with a new song….and this song is a bit more accessible than the screechingly impenetrable speed metal.

    They begin to play this new song on the radio. At first, he’s excited—“Dude, this is that band I’ve been talking about. See…these guys ROCK!”

    After a while, though, the song gets so much “conventional” airplay that his “discovery” is diluted.

    And then…

    His little sister, who idles her time away in the frivlous harmonies of BoyBanders, knocks on his bedroom door—ignoring the conspicuous demand plastered right above her knocking knuckle that reads: “KEPP OUT. DO NOT DISTURB ME FOR I AM DISTURBED”.

    “Hi Anonymous. My friends are coming over and we were wondering if we could listen to your Metalicca CD?”

    His artistic and intellectual world crumbles…and he lashes out against his heroes.

    So sad….so sad.

  22. Anonymous

    His argument has meirt and just does not quite ring true. Why do you need the S&P to go down 20% for Private equity firms to get in trouble. Most of their assets are highly leveraged, many of their companies need reorganising at the very least. Private Equity firms have all the attributes of cannon fodder on the frontlines of the economic battle. Only those Private Equity firms which have actively managed and re-organised ,and there are some will survive in my view.

  23. Anonymous

    Does anyone know roughly when in ’08 BCG published the study that gives the 40 by 2011 figure? I found a (mostly rosy) report from February ’08, but that doesn’t seem to be the source.

    – Ben

  24. Anonymous

    Answered my own question:

    ‘Get Ready for the Private Equity Shakeout’ by Heino Meerkatt and Heinrich Liechtenstein of BCG and IESE respectively for anyone that cares.

    – Ben

  25. albie


    "…Having read 2 of Taleb's books I can see what Anon@1223 says about Taleb's "I told you so" tone he sometimes has….."

    You need to understand, he's Lebanese, It's a cultural thing, NNT is a brilliant man, I have a lot of affection for his rudesness. Just like Americans think that the French are rude. I always tell my American friends, if you think that they are rude with you, you should see how they are with each other.

    I'm anticipating that the S&P will discount earnings of $55 for 2009 at, and I'm being generous, 10 times earnings. And I'm the bull amongst my peers, they're looking for PE ratios of 6 to 8.

    Best regards,


  26. Anonymous

    Taleb has been trying to point out how wrong all the quants relying on induction have been for 10 years. You have no idea how much abuse and derision he suffered…for being 100% right the whole time. I have no problem with his in your face arrogance. It is the unjustified arrogance on the fools he dresses down that should not be tolerated.

  27. Anonymous

    “I learned nothing from ‘Fooled by Randomness’ or the ‘Black Swan’ that I didnt get in my first year on Wall Streett”- NYCTrader

    Total self centered BS.

    There are some very original thoughts and philosophical points about the human thought process that Taleb wrote about. His framework, within which he separates fixed rule games and physical pheonomenon (where the Gaussian can be applied)…and the scalable non linear winner take all pheonomenon (where application of the Gaussian leads to disaster..always) was very oringal.

    You expect us to believe that you have had that framework in your mind for a decade? How did you keep your job while telling all the quants that their risk models were wrong…and doomed?

  28. Anonymous

    “it makes me very worried about what they’ll eventually decide to do.”

    The new team is dedicated to the Japanese approach–avoid price discovery at all costs.


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