Amid the fevered press coverage of the credit crunch, the sentiments of an anonymous investment banker quoted by the UK's Sunday Times perhaps best sum up the mood: “People are spooked, there is a feeling that there are some surprises out there. Clarity is very important right now.” Unfortunately for this banker and all others seeking order amid the chaos, the current situation is about as clear as mud.
At the larger end of the buyout market, one thing can be said with certainty: deal activity is at snail's pace compared with the furious tempo that was being sustained up until just a few short months ago. Hopes that the end of the summer holiday break would bring with it a return to “business as usual” were put to the sword.
In our Performance Special (see our coverage beginning on page 61), we consider the impact current market conditions may have on buyout returns. There are some easy observations to be made – for example that the implications of committing larger equity slices to deals will be unhelpful in a returns context. But there are also various imponderables at this point: to what degree might strife in the financial services sector leak out into the “real economy”? And how effectively will private equity firms tailor their strategic approaches to changed circumstances?
Before succumbing to feelings of gloom, it's worth reading the considered thoughts of CalSTRS' Real Desrochers (see page 50) and various leading lights within the Swiss LP community (see our Switzerland feature starting on page 80). Here, we are served a reminder, as if one were really needed, that private equity is viewed (at least by the most shrewd investors) as a long-term commitment rather than short-term gamble. They, it is clear, will not allow ephemeral phenomena to distract them from the task of shoring up further the private equity portfolios that have served them so well.
It's also worth pondering the diversity of the asset class in times such as these. In Silicon Valley (see Privately Speaking, page 54), the thoughts of leading investors appear to have less to do with the vicissitudes of the leverage market and more with exploiting opportunities in the dynamic economies of China and India. The US mid-market, meanwhile, is also happily pre-occupied with issues other than the credit crunch (see page 70).
To return to the point made at the outset, a lack of clarity is unnerving. But a lack of faith in its prospects would be a whole lot more damaging for private equity. And, as yet at least, there's very little evidence of the latter.
Enjoy the issue,