The headlines of the 10 most popular stories on PEO in October read something like a prose poem about a peaking market. New records set, mega funds launching and closing and a bonanza of buyouts all contributed to this ode to success.
But there were also stories that may have provoked readers to reflect on the long-term future of the asset class. For instance, news broke of one veteran buyout executive joining the growing number of former general partners who have called it a day. To these veteran dealmakers, the golf course apparently looks as good a place as any to sit out the downturn that will inevitably come.
Questions over whether the boom may be starting to turn to bust were also prompted by Doughty Hanson, which walked away empty-handed from the public markets after abandoning its plans to list a fund in Amsterdam.
But by far the most popular story in October was our coverage of a doom-laden prophecy from Guy Hands, Terra Firma founder and a veteran deal-doer.
Speaking at a conference in London, Hands warned that the buyout industry is putting itself at an increasing level of risk because of the growing complexity in deal financing. He said the over-complication of deal structures was potentially the precursor to a major blow-out.
He likened the current popularity of private equity to the boom that led to the stock market crash of 1929 when “demand was out of control” and leveraged investment trusts proliferated and invested in their rivals.
He said today private equity managers were enjoying a similarly golden age that might not last, especially in structures that piled leverage on leverage, where hedge funds invested in publicly quoted private equity funds.
But if a disaster really is looming, according to Hands, then the responsibility for action lies as much with investors as with the buyout managers themselves. “Caveat emptor”, Hands urged, cautioning investors to be more discerning lest they become “third class passengers” on the private equity bandwagon.
On the part of the managers, Hands recommended a little more “skin in the game” to curb the industry's more egregious excesses.
He also noted the return of investment banks to private equity as principal investors, having pulled out in the aftermath of the TMT bubble. Their comeback may be another sign of an overheating market. Timing private equity is impossible, managers tell investors, which is why you need to invest through the cycle. But if, as Hands suggested, the current environment is indeed similar to the stock market prior to the Great Crash when, to quote JK Galbraith, 'investors would supply capital with enthusiasm and without tedious questions‘, then the banks’ renewed ardour for the asset class could be cause for concern.