SPECIAL REPORT: A Question of Character: PE Firms Begin Scorched Earth Policy
It's Time to Clean Up Your Rolodex

Big, big problem brewing.

It seems that numerous buyers, almost all of them private equity shops, but also some hedge funds with failed or bored day traders that want to be private equity guys, are walking away from purchase agreements left and right.

Their excuse is "the current credit crisis."

But everyone knows that's a lie.

Deals are collapsing even where the lenders - like honest businessmen - have stuck to the original terms despite the loss the deal will produce for them. And in cases where the terms have slightly changed between the purchase agreement and closing, it's really been a matter of a point or so, which, compared to record low rates, still makes the deal wildly profitable for the buyers in the long run.

No, something else is going on, and in my opinion it's this: Certain buyers are finally showing their true colors. They're Liars. Scoundrels. Cheats. Quitters. And Punks. You knew these guys on the playground, in the neighborhood, and on the athletic fields. Their word was worthless, and they'd cheat as soon as they thought no one was looking. When you called them on it they'd get a safe 20 yards away, call you an almost-harsh name, and race home to mommy. Think back, you can picture his pasty little face even to this day.

These same guys grew up, got some cash, and despite their lack of spine, somehow learned how to close a deal. But their past is now catching up with them. All it took was an uptick or two on the term sheet. And as soon as the going doesn't go exactly their way - "....But I absolutely need 5.5% - AND - a no-covenant deal!...." - they reneg on their word and signature. Hiding safely behind your restraint instead of mommy, they no longer fear the punch in the nose. And since their reputation was a facade of cash and bling and jets, they could care less that they're now being called Liars. Scoundrels. Cheats. Quitters. And Punks. They've known this about themselves their whole lives anyway. "Who cares?!" they whine, "I've got a massive fund, a glittering office, and enough sycophants to kiss my behind for the next 100 years. Whatever."

Here's what they may have overlooked: They're going to be blacklisted from deals.

They must be blackballed as buyers for the integrity of dealmaking.

Any i-banker or intermediary that brings one of these two-faced mamby pamby faux buyers to an auction or buyout should immediately be fired for gross incompetence. No one should deal with them ever again. Their staffs need to quit and join honest shops. Lenders need to pass on staple deals with them. And don't attend their "Am-I-not-glamorous!" benchmark birthday parties either.

I'd like to say that this is just an East Coast problem, but it's not.

A massive and well-known Chicago fund with gobs of traders that are used to hiding (apt word, no?) behind computer monitors all day long, and don't know a term sheet from a non-disclosure agreement, has made front page news by pulling up its skirt and skipping away from a recent and mega purchase agreement. How it got invited to the deal was simple - yet stupid: Cash - a balance sheet bigger than a third world country. Nothing whatsoever beyond that. Lesson learned.

Now, if sellers and intermediaries have any brains, this firm will never, ever, be invited back to a deal again. The light of day at the dealmking table needs to burn brighter than the wacked-out glow of a dark trading room loaded with anonymous - and mostly juvenile - geeks flipping Tanzanian currency and Estonian crude all day long. Good riddance.

I'd also like to think that this problem is solely confined to large deals, or hedge fund kiddies that want to be PE guys. It's not.

I was talking last week to a successful middle-market i-banker here in Chicago that I know and he shared how not one, but two different middle-market private equity shops recently hiked up their skirt and reneged on signed term sheets to buy a Midwest-based manufacturer his firm represents. They too gave the same excuse. Credit crisis. It too was a lie. The banks confirmed that they would honor the original deals given to these would-be buyers. Drop these two from future auctions.

Well, dust off and modify the old saying: Burn the marketplace once, shame on you, burn it twice, shame on us.

Don't play the sucker. Compare notes with your peers. Stay on top of shops and buyers that have quit deals. They are certain to waste your time, and money, and make you look like a fool.

Follow-up report: You probably have a bad tale or two as well. Drop me note, I'm most interested in what you are seeing on your deals in this regard. Or maybe you're a PE shop that feels strongly about this issue as well. As always, we don't publish your name unless you ask us.