Friday letter conference table conversations

US voters are said to be having nervous “kitchen table conversations” amid economic uncertainty. Similar conversations are happening now in private equity conference rooms.  

Contenders for the White House are trying to outdo each other in proclaiming awareness of “kitchen table conversations”, during which voting family members are presumably discussing their household financial challenges.

In a higher tax bracket are what might be called “conference table conversations” between GPs, discussing what might happen if carry dries up, portfolio companies go bankrupt and LPs grow cold. Will the “fund family” become dysfunctional?

Already, market participants are reporting that a number of private equity firms are quietly trying to break apart. One London lawyer recently told our sister publication, PEI Manager, that he was working with more than one private equity firm whose founders were seeking to split amid weak performance.

Data released this week gives some context to these conference table conversations. The number of buyouts in Continental Europe in the first half of 2008 was down 19 percent compared to the same period last year, while the average deal size dropped from €113 million ($165 million) to €70 million, according to figures from the Centre of Management Buyout Research. GPs are worried about putting capital to work.

Meanwhile, Dow Jones researchers found that European venture deals hit a nine-year low in the second quarter.

The US private equity and venture capital industries are also being plagued by a severely slowed M&A environment, frozen IPO market and a softer economy, which spell trouble for portfolio companies and exit potentials.

In recent weeks, PEO has reported on bankrupt portfolio companies owned by firms including Madison Dearborn Partners, HIG affiliate Bayside Capital, Sun Capital, TA Associates and Capricorn Investors. Prominent mark-downs have also proliferated.

More of these lacklustre developments are surely on the way. Firms founded in private equity’s recent boom years will see their survival skills tested amid this less buoyant market cycle. And for more established firms, it will put further strain on GPs already grappling with generational issues and succession plans.

The most difficult conversation of all is this one – if a fund looks like it won’t surpass an 8 percent IRR, the GPs get no carry. This is the kind of bad news that causes GPs to vote with their feet and set up shop somewhere else.