In the July/August issue of Private Equity International, we speculated in this column that market participants might be feeling nostalgic for a return to the ‘good old days’ of two or three months prior when image problems were associated with such things as leverage ratios and job creation – what might be termed ‘deal-related issues’. At least that would be preferable, we figured, to the seemingly relentless focus on their tax affairs.
If that was indeed the wish, then it has been granted. The focus is once again on deals. However, given the havoc wreaked by the turmoil in global money markets, it's doubtful whether this is really a cause for celebration. Speaking of the fallout from what is now widely referred to as “sub-prime contagion”, Lehman Brothers economist Drew Matus told the Financial Times: “We are in a minefield. No one knows where the mines are planted and we are just trying to stumble through.” For some private equity professionals today – in particular those operating in the suddenly subdued LBO arena – those words will likely have some resonance. Our profile of the Alliance Boots deal (see page 48) provides a neat illustration of current woes in the debt market.
At such times, it's worth reminding ourselves of private equity firms' ability to prosper in difficult markets as well as benign ones. Take secondary investors, which, for a while now, have been scrambling to generate good returns in a market characterised by a flood of capital and fierce competition for assets (see our Secondaries Special, starting on page 61).
From the secondary players' slog has been born innovation. For example, sophistication has been shown in securitising portfolios of funds into different tranches and in taking these vehicles public. In doing so, they provide liquidity for LPs and access to the asset class for new investors. You can be sure that if it were still “easy” to buy discounted fund interests and ride these to enhanced-return victory, no one would be bothering with any such complex secondary strategies.
At present, it is unclear whether the sub-prime storm will quickly blow over or instead be the catalyst of a downturn. One conclusion can be reached with some confidence, however: if GP dealmakers show as much creativity as their secondary cousins in tougher times, private equity's future remains bright.
Enjoy the issue,