In the last month, two clear camps have emerged online. One spends its time toasting the recently deceased as the credit crunch constrains industry activity; the other raises a glass to the opportunity global financial turbulence represents.
Robert Salomon, assistant professor of management at Stern School, New York University describes the end of an era (http://tiny.cc/9IaTY) on his blog.
He has been writing for some time now about private equity firms, their questionable acquisitions, their untenable leverage positions, and the likely outcome for them and their portfolio firms as a result of the credit crisis.
According to Salomon we will look back at this period and eventually refer to it as the ‘second buyout wave’. In his opinion, there are now two identifiable and distinct waves:
The 1980s: The wave that most of us associate with the LBO heyday, driven by the break-up of conglomerates, culminating with the RJR Nabisco deal, and etched in our memories by the movie Wall Street.
The 2000s: The cheap money wave, fueled by excess leverage, cov-lite deals, financial engineering, and a dose of Sarbanes-Oxley compliance avoidance.
The latest private equity craze is now officially over, a view Salomon shares with Michael J. de la Merced at the New York Times.
He is watching the buyout industry stagger under the weight of its debt (http://tiny.cc/zS9qU). Celebrated buyout firms, hailed for their deal-making prowess, are seeing profits collapse as the credit crisis spreads through the financial markets. And de la Merced is painting a picture of investor fear in apocalyptic terms: “They see the handwriting on the wall,” said Martin S. Fridson, a leading expert on junk bonds, of buyout firms. “They're staring into the jaws of hell.”
The speed and ferocity of the industry's reversal have taken even Wall Street by surprise. Carlyle Capital, a highly leveraged credit fund linked to the Washington-based Carlyle Group, confronted the prospect of insolvency.
And the companies that private equity firms have acquired may be the next to suffer. But if half the opinion in the market tells us to be braced for the worst, the other half is pointing the way to opportunity ahead.
KKR, one of the industry's pioneers, has arguably had as rough a ride as any. When the firm's Private Equity Investors group, which is publicly traded in Amsterdam, held a conference call recently, Henry Kravis talked about the state of private equity.
Tom Tauli's Blogging Buyouts (http://tiny.cc/AHbo3) said it did not make easy listening since the fund had to mark down the valuations of seven holdings. In fact, the return of the portfolio was -0.1 percent last year, and the fund is trading at a 38 percent discount to its net asset value.
Simply put, Kravis said that dealmakers will need to be creative. This means locating capital from alternative sources, such as private investors and hedge funds. There will also be more minority investments.
Kravis also stressed that KKR will continue to stick to its investment philosophy. This means focusing on companies that have stable revenues, diversified global platforms and room for operational improvement.
More importantly, Kravis said that the private equity business is about the long term. If anything, the best opportunities are when markets are in the midst of dislocations – which is certainly the case now.
How long this ‘dislocation’ will last is anyone's guess. Over at Reuters Blogs (http://tiny.cc/5UjTz) Oak Hill Capital Partners' Steven Gruber said: “It's like asking what the weather's going to be a year from now. This may be one of the bad hurricanes, but the world will recover — it's a question of how long.”
For now, the weather's cloudy. But clouds always have a silver lining.