Editor's letter

At the risk of making it seem like yesterday's news – which it clearly isn't – this column will mention the credit crunch but once. And only to say: not a great deal has changed. It's still with us, it is if anything getting a little worse, and mega-buyouts are no more able to be financed now than they were in the immediate aftermath of last summer's turmoil. Enough said.

It may not be a subject that will lighten the mood any, but recession is arguably a more interesting talking point. The question of whether a US recession will actually happen appears to be decreasing in relevance by the day: perhaps the question we should now be asking is not ‘will there be one?’ but rather ‘how severe will it be?’ “Very severe” is the prediction of Michael Englund of economic analysts Action Economics. Interviewed in the Financial Post, he said: “There seems to be a sense of a very deep-seated collapse in the economy”.

The likely depth of any recession is of course something to keep private equity professionals minds occupied, and perhaps even ticking over into the small hours normally reserved for sleep. But, there again, others may have cause for celebrating every single mention of the “r” word. This thought is prompted by another interesting question, namely: who stands to prosper through a downturn and who to suffer?

Mid-market GPs have in many cases been keen to insist that, thanks in part to their more modest use of leverage, they are immune from the meltdown that has afflicted their larger-sized peers. However, as we pointed out in our February issue, there is little evidence of a mid-market “decoupling” – deal flow in the space is declining and a recession would be bound to have grave implications. (See our European mid-market coverage starting on page 65).

European venture capitalists are also currently basking in the glow of the limelight that has been redirected away from previously celebrated LBO funds. But they too would find life tough should the economy head south. Indeed, given their portfolio companies' often deep exposure to the US market, they are feeling some of the strain already (see Privately Speaking, page 46).

There certainly are beneficiaries of harder times, though. In this and previous issues we have cited the way in which distressed, mezzanine and secondary investors might for various reasons find conditions to their liking. It may come as a surprise to some, but it appears there is an argument for adding funds of funds managers to that list too. Turn to our Special on page 53 to find out why operators in the space are staffing up and feeling bullish.

Enjoy the issue,

Andy Thomsonandy.t@peimedia.com