Friday Letter: Small mercies

As the credit crisis throttles the mega fund deal flow and private equity’s doom mongers sound the death knell for an industry allegedly on the brink of disaster, PEO takes stock and looks for half a dozen reasons to be cheerful despite the misery.  

1. Thank heavens for that

Bankers’ bonuses are going to be smaller this year, but at last the top of the market has been called. The lending frenzy has abated and discipline is returning to the credit market. After so many months dominated by the need to beat your rival to the fee at any cost, the banks have remembered they can say no.


2. I can resist anything except temptation

C’mon sponsors admit it: while the banks were offering cheap money on a plate, it was tempting to take an extra turn on the gearing beyond what you thought the business should ideally be asked to support. In fact, it was possible to do that and still look prudent as you turned down excess finance. Not that it mattered while the tide was rising. But many sponsors had been privately wishing for a while that the tide would turn.


3. It may not be not contagious

We’re still holding our breath while the banks count the cost of the subprime debacle and everyone is paying close attention to the numbers coming out of the US. And yes: things may well get worse before they get better. But whisper it, most private equity portfolios appear in good shape and corporate trading is holding firm. Irrational exuberance is out of place and so is smugness, but some private equity-backed businesses may be ready for refinancing again just as soon as the banks are, too.


4. The shop’s still open

And some banks are ready and willing even now. The smaller ticket deals of private equity’s mid-market heartland in particular are trundling along: here it seems business as usual, which has got to be a good feeling after all the collateral damage that many feel the mega funds have inflicted on their smaller peers. In fact, you could hardly blame the mid-market buyout firms for blowing a large raspberry in the mega funds’ face. It might be graceless, but it is probably irresistible.


5. A chance for venture

The gap in the headlines left by a slow down in large scale M&A might also create a space in the spotlight for venture funds to prosper. Here it’s not about leverage, it’s about backing great ideas and management to build businesses and generate value for investors. If not venture, then what about emerging markets or infrastructure or distressed debt? And even the mainstream private equity groups should not be written off: the best time to invest is the time of maximum uncertainty. 2007 could be a vintage of legend.


6. Come on in, the water’s lovely

Smart LPs understand that last point well, which is why one placement agent recently compared the squall in the credit markets to a storm the industry appeared to be driving through with the windows down. This may seem a tad premature, but who knows? Perhaps an Indian summer beckons once the buyout guys and their bankers return from their summer breaks.