Subscribe to this page
EquityFC Blog
Showing entries posted in February 2009
Showing items 1 to 2 of 2
Previous |
But on the other hand... | 5 February 2009
Yesterday we highlighted the bullishness that's present among many in the private equity world. (Although perhaps "bullishness" is overstating it... "resilience"? Perhaps "positivity"?) But there are still many who see problems for PE funds this year, as well as opportunities from cash-hungry businesses and more realistic asset prices.
The big problem is that while low asset prices make acquisitions attractive, they also make exits painful. Even firms that don't have to worry about fund churn - and can avoid making untimely exits - are facing some big write-downs that will affect attractiveness as an asset class.
Debt roll-overs (which Henry Kravis sees as an opportunity to pick up equity on the cheap, see yesterday's post) will also hurt the big LBO players. According to unions on both sides of the Atlantic, "more than $500bn (£346bn) of private equity debt needs to berenegotiated by 2010. They cited a prediction by Alchemy Partners' bossJon Moulton that up to 30% of mid-market buyouts could end in default." Others have picked up this theme of a "looming disaster for private equity".
In fact I think they're overplaying that last point. While the big LBOs are mega-leveraged (even small percentage drops in cash flow start to really hurt their ability to repay debt, and rolling over a couple of billion is no cake-walk), mid-market firms with visible cash-flows and a clear ability to meet debt payments ought to be able to get roll-overs away. After all, notwothstanding what the media are saying, banks exist to lend money - and so long as the risk profile is right, they will. It's just that the risk profile for many businesses has been badly hit by recession fears.
And that's the important bit: PE-backed companies with a track record of disciplined financial management and visibility of earnings should be fine. Better yet, mid-market and venture PE funds are much happier pumping in money to fund growth and working capital - since that's always been part of the business model. For FDs and FCs, then, these businesses still represent a real opportunity - and, if anything, the current economic conditions make smaller, more agile and more innovative companies that much more engaging for both investors and management.
"Private equity is not dead" | 4 February 2009
So sayeth Henry Kravis, KKR's eponymous commander-in-chief and PE survivor of at least two recessions and one major banking crisis. He was speaking at Davos - we can't imagine anyone being better qualified to join assorted other Masters of the Universe than Henry - and made it clear that the industry has a huge role to play in (effectively) bailing out companies whose debt is falling due at a time when fresh capital is hard to find.
Does this "big beast" financial opportunism work for growth businesses in the mid-market? Well, possibly. In recent conversations with PE managers and the FDs at mid-market businesses, the prevailing attitude is one of grim determination to make the most of this recession year. (Grim, in the sense that everyone is feeling a little pain at the moment; determination, because almost everyone I 've talked to thinks "this, too, will pass"; this recession year, since Im hoping at least part of 2010 will see a return to growth.)
PE needs ambitious entrepreneurs partnered with smart, disciplined FDs and FCs to deliver decent returns. And while asset prices are in the bog - and those big-beast corporates with their rolling-over debt need cash from spun-out subsidiaries - mid-market PE players are right to be optimistic about the opportunities.