Where on earth are we?

The Radisson SAS Scandinavia Hotel, Copenhagen. The blue neon sign looms large over the road connecting Copenhagen Airport with the city centre. It burns through the light mist of the Skandinavian early morning, welcoming the arriving delegates to the EVCA Buyout Forum 2010.

The signs in the hotel’s conference area are clear and visible, and yet the assembling buyout professionals seem to be having trouble deciding where they stand. “I have never felt less comfortable about understanding where we are headed,” muses Janusz Heath, managing director of Capital Dynamics, during a panel discussion on the future of the asset class. He refers of course to the macroeconomic and investment climate.

The Radisson SAS Scandinavia: Uncertainty reins at the buyout forum

First to take the podium was John Singer, a London-based managing partner with Advent International. His keynote address felt upbeat, but perhaps this was more to do with the delivery – Singer is a naturally animated, gregarious character. The facts and data points that bounced onto the screen of his PowerPoint presentation added up to a confusing picture, fuelling optimism and pessimism in equal measure.

Deal flow is tough, capital calls are still outpacing distributions and funds are taking on average 19 months to raise. In contrast, there is still increasing appetite from limited partners to invest in the asset class and – historically – post-recession years have produced the best-performing investments, he said.

Singer left room for optimism, but his successor on the podium, distressed debt investor Howard Marks, gave everyone a cold shower. Having outlined his 13 lessons learnt from the current boom-bust cycle (these actually apply to all cycles in history, Marks noted), he drew delegates’ attention to the current situation, which is displaying most of the characteristics of a bubble.

The return of “drive-by” deals in the high yield bond market – in which bonds can be sold “blind” to eager investors after the markets have closed in advance of the following day – are indicative of the rapid return of the capital markets, said Marks. Investors, for fear of missing out on the opportunity, commit to buying without undertaking the proper due diligence. Low interest rates, he said, are pushing investors to make riskier investments.

“I’m shocked by the extent to which the market has come back,” said Marks.  The lessons have already been forgotten.

Speakers and delegates at the event wrestled with questions about the future of the asset class, often reaching some quite unexpected conclusions.

The large buyout is far from dead and it is the mid-market which faces the toughest challenge, said Heath, flying in the face of popular market sentiment. Heath explained that in his view, being a “local” operator with a small fund will become increasingly challenging in a more institutionalised and globalised world.

Heath was contributing to a debate on the manager model of the future, in which Christian Dummett, head of UK business development for LGT Capital Partners, proposed that single-strategy managers would struggle compared to those pursuing multiple strategies. The risk of the single-product model, in which managers raise one fund around every three years, has already resulted in some high profile casualties, he noted.

Paul Ward, a partner at fund of funds group Pantheon, quashed any misconception that we are in the post-recessionary hunting period that in previous cycles has resulted in astronomic returns. Pricing and leverage levels are still “quite significant”, he said. “It does feel different to previous cycles.” He added that in some cases GPs have been telling him to expect returns of around 2x money with IRRs in the “high teens” on new investments.

Despite the lack of clarity about the current situation, optimism for the long-term had not diminished. The prospect of the $100 billion buyout raised its head more than once, as did the belief that the private equity model – with its superior governance – would only increase its standing in the global capital markets. We may not know where we are, but at least we still have a good sense of where we are going.