Friday Letter Brakes squealing

Investors are increasingly concerned. Managers may have curtailed any investment excesses as credit markets have closed, but are they in denial still as capital market pain turns to economic reality?  

Delegates to European trade association EVCA’s annual investor forum in Geneva this week could have been forgiven for believing everything was alright.

According to numbers revealed to the congregation of the faithful, at worst the industry had gone sideways. As long as you were prepared to strip out the record-breaking year of 2006, when private equity firms raised €112 billion for investment in Europe, the preliminary fundraising figure for 2007 at €74.3 billion looked healthy. Just ahead of the fundraising total for 2005. Normalcy restored.

Investment levels were constant with previous years. And performance was solid.

As Helmut Schuesler, managing partner of Techno Venture Management and this year’s chairman of EVCA, observed: “The industry is holding its own at a time when other sectors are being severely punished.”

Sunny side up, the credit crisis should create opportunities, Sandra Robertson, chief investment officer for Oxford University’s asset management arm, reported from a closed session for limited partners.

She said some limited partners were encouraging their general partners to double down and to invest in impaired debt of portfolio companies: “Don’t just go out and raise a fund, talk to your limited partners and adjust your terms.”

Meanwhile European venture capital was creeping back on to the agenda, a sure sign of boldness among investors.

And yet this was a week of extreme volatility in the markets. Gold soared. Again. And oil hit $111 a barrel. This was also the week that an $81 billion private equity manager failed to persuade the banks to cut it some slack and help it bail out its beleaguered credit affiliate. Instead The Carlyle Group handed over the keys of the Carlyle Capital Corporation to the banks after failing to stabilise its financing of the AAA-rated mortgage vehicle.

As one investor noted, the velocity of capital is screeching to a halt. That is the sound of the brakes being slammed on, of systemic de-leveraging. And no one knows where or when it will stop.

But the last word and probably the last laugh went to Jeremy Coller, founder of secondaries firm Coller Capital, who had handed out a fresh edition of his famous IRR calculator. For the first time he has included a red line of negative IRRs to show what happens when you lose half your money. He said it was for the benefit of the buyout firms.

And for the record, after 10 years the IRR when you have lost half your money is -7 percent. Ouch.