The mega buyout boom is over. Investors are clamouring for mid-market funds. The banks are open for business on deals up to a €1 billion. Growth capital is the new mega deal and even venture is enjoying some time in the spotlight, because neither of these depends on leverage to produce alpha juice for investors. (Although investors in European venture may argue they have in the main not seen any juice for some time.)
So what are the mega funds doing? Well, for the most part they will be focussing on portfolio company business and making sure that if they have over-leveraged a company, they have a plan in place to arrest its descent into distress. Staying on good terms with their bankers is invariably part of the plan.
Some private equity financiers are clearly disappointed by the banks’ timidity in committing to new deals. Guy Hands, the illustrious UK deal maker, is a prominent example. He said at a recent conference bankers were happy “in a pack” and liked “to smell easy prey and push each other out of the way for food”. But, he added, “like any loyal dogs, when they get hit, they whimper”.
Alternatively, they bite back. Shown little love at the top of the market by buyout firms which were happy to watch the banks scrap it out, those same banks will be loveless in their treatment of equity on the way back down.
Those buyout firms that kept the banks on a tight leash will find their puppy now has quite a bite. Late with your monthly management accounts? Expect a letter from your banker’s lawyer. Miss your protected profit target? Lawyer’s letter. Want to reset your covenants? No way. Let’s talk about your equity. Fed up with your bank’s punitive attitude? Bad luck, we’re the only bank you’ve got.
Bankers often extol the virtues of relationship banking. But it appears difficult to break the patterns of behaviour when they turn abusive. If the real economy is souring (and there seems to be less and less doubt on this), it will be interesting to see whether tough love or true love will be the basis of the banks’ relationships with their private equity clients.