Friday Letter Quiet rock stars

This year’s World Economic Forum in Davos has been a sombre affair. Gloomy economic outlooks have dominated the discourse, while some titans of industry opted to stay home entirely, circumventing the headline risk associated with attending a fancy conference amid a global downturn.  

Davos 2009 is lacking its characteristic “swagger” because the “rock stars” of the event in years past, “the private equity guys, the investment bankers, the sovereign wealth funds, the hedge funds”, didn’t turn up or are keeping a low profile, a Condé Nast journalist told CNBC viewers yesterday.

Well, not exactly. Stephen Schwarzman, The Blackstone Group’s chief executive, was one of several buyout bosses who boldly spoke up this week on behalf of industry concerns. He talked about the need for more leverage, less government regulation and the elimination of fair value accounting requirements, and he did it so passionately that he reportedly leapt out of his seat, interrupted a town hall discussion and grabbed a microphone to voice his views.

Attendees didn’t quite get why Schwarzman thought these measures would aid the economy’s poor health – 70 percent of those in attendance reportedly used electronic polling devices to disagree with him – but his private equity peers would have. In effect, Schwarzman seems to wish for pre-crisis conditions to return. This is not going to happen, but there is probably no one in the buyout industry today who wouldn’t want it, too.

Clearly the pressure is getting to GPs. Firms like EQT Partners, Thomas H Lee, Deutsche Beteiligungs and Bain Capital have all recently aggressively written down their holdings. Even the distressed specialists are finding things too difficult for their liking. For example, New York turnaround artist MatlinPatterson is reportedly raising a $165 million annex fund specifically to aid distressed portfolio companies from its 2003 distressed vehicle – that tells you just how bad things are. 

“Everyone’s portfolio is screwed right now. Anyone who tells you otherwise is lying,” one London-based manager charged last week. Even if a portfolio company isn’t struggling in this economic environment – an increasingly rare phenomenon, he added – its comparable companies likely are, which for accounting purposes means the same thing for portfolio value.

However, it isn’t all doom and gloom for private equity, and Schwarzman in Davos was right to point this out. “The US economy and large parts of the global economy are under enormous stress, and enormous pressures, and are likely to remain that way for some time,” he told Bloomberg. “For our existing portfolio, it creates pressures on operations, but fortunately for us, we don’t have maturities in virtually all of our companies for about four years, so that leaves us in a relatively good position.”

Still, clearly not everyone will be around long enough to try and resurrect their portfolios. Instead of doing Davos, 3i boss Philip Yea was forced to stay in London – and is suddenly out of a job. Although his handing the reigns to 3i veteran Michael Queen was billed as succession planning in action, it coincided with the revelation of massive portfolio write-downs. The firm’s share price has fallen more than 78 percent from its January 2008 peak, and although no one in the market saw it coming, someone – possibly Yea himself? – decided now was the time for a change of leadership. 

Events like these help explain why many Davos rock stars have been stunned into silence – or conversely spurred into urging large-scale financial reform. For private equity firms, it is quite clearly not business as usual and, while helpful to discuss and debate potential solutions to stimulate change, it’s hard to shake the feeling that conference talk alone may not do the trick.

PS: Polls close in 24 hours for the final round of voting in the Private Equity International Awards 2008. Vote now!