2009—Private Equity’s Most Boring Year. Good Riddance!


In 2008, credit froze up but we still had lots of leftover boom-era fun to ogle at. The first half of the year saw plenty of MAC drama from mega-buyouts gone bad, and the second half, well you know what happened then.

But in 2009 what did we get? Frozen credit, frozen deal-doing, frozen fundraising, a pile of never-ending pay-to-play crap, and an even bigger pile of hopeful, optimistic punditry. YAWN!

So here’s hoping 2010 will be rife with heated M&A auctions, warmer fundraising markets, IPOs-a-blazing, the end of pay-to-play, and realistic punditry. Cheers!

Capping off our year-end series, we asked PE pros for some reflections on 2009 and predictions for 2010. Here are some of their answers. For more year-end reflection, go here. To chime in, GPs can send responses here.

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Mitchell Presser, Paine & Partners

What was the headline for 2009’s private equity market?

“VOLATILITY AND UNCERTAINTY RESULTED IN LIMITED DEAL ACTIVITY”
Volatility and uncertainty in both the economy and the debt markets.  The year ended with great strength and liquidity in much of the debt markets, but continued uncertainty in the economy.

What will become the 2010 headline?

It is likely to be “THE BEGINNING OF A LONG, SLOW RECOVERY.” Although capital markets may be stronger, underlying fundamentals do not yet have the same momentum. We appear to have reached a point of stabilization, but the recovery will be bumpy and slow.  That said, there should be a pick up in deal activity as buyers and sellers get more comfortable with the environment and as opportunities start to develop.  There will be many opportunities, but investors need to be prepared for longer holding periods and investments need to be capitalized to be able to survive continued volatility.

What will be different in 2010, for the industry and for your own investment activity?

There will be more deal activity than we saw in 2009. It will be driven by greater availability of financing for new transactions than we saw throughout most of 2009, as well as a need for more equity capital to help repair balance sheets, and foster growth.  Businesses have been retrenching for quite a while now. There will be opportunities to help businesses with strong market positions start to expand again.

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Ted Carroll, Noson Lawen Partners

What was the headline for 2009’s private equity market?

“THE CHICKENS COME HOME TO ROOST”

What will become the 2010 headline?

“MEET THE NEW BOSS (FORMERLY KNOWN AS YOUR LENDERS)”

What will be different in 2010, for the industry and for your own investment activity?

Real value returns as lenders seek liquidity of illiquid holdings.

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Chris Brodhead of Deltapoint Capital Management:

What was the headline for 2009’s private equity market?

“P.E. FIRMS ESCHEW NEW INVESTMENT OPPORTUNITIES TO FOCUS ON PORTFOLIO MANAGEMENT.”

What will become the 2010 headline?

“LBO FUND MANAGERS REPORT ATTRACTIVE OPPORTUNITIES WHILE CREDIT MARKETS SLOWLY THAW.”

What will be different in 2010, for the industry and for your own investment activity?

While we’ve always been thorough in our evaluation of management at prospective portfolio companies, we will be increasingly so in 2010 and beyond.  Financial engineering isn’t enough (and is impossible in some cases given the lending markets), so returns will have to be generated through strong earnings growth and multiple expansion by adding value through operational excellence and professionalization of management.  This approach will suggest a more strict and drawn out due diligence process.  Deals that took 60-90 days between LOI and closing could now take as much as 90-150.  There’s still a lot of blood in the water and we’ll be dipping our toes back in very carefully in the coming months.

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Peter Yu, Cartesian Capital

What was the headline for 2009’s private equity market?

“END OF ARTIFICIAL LIQUIDITY CREATES DEARTH OF MEGA-LBO DEALS

What will become the 2010 headline?

“MEGA-FIRMS DIVERSITY FROM CORE TO LBO PRACTICE”
“IPOs & ASSET-GATHERING ACTIVITY DISTRACT FROM BUBBLE BUYOUT’S PENDING DEBT CRISIS”

What will be different in 2010, for the industry and for your own investment activity?

For us, 2009 was a year of truly extraordinary opportunities:  capitalizing on dislocations has always been our focus and 2009 was rich with dislocations.

The yawning gap that has developed between equity markets and economic reality will persist in 2010. (Central-bank-created liquidity is to investment-bank-created liquidity as methadone is to heroin:  perhaps less toxic but causing equally severe withdrawal.)

As a result, investment opportunities in 2010—for value and growth-oriented investors at least—will generally be less attractive.

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Richard Lawson, Huntsman Gay

What was the headline for 2009’s private equity market?

“DEAL FLOW BECAME INCREASINGLY EVENT-DRIVEN IN A TREMENDOUSLY CHALLENGING ENVIRONMENT”

What was the year’s most important development that didn’t get the attention it deserved?

The emergence of post-credit crisis $1billion+ debut funds that are endeavoring to create a new model for the private equity industry – “Private Equity 2.0”

What will become the 2010 headline?

“THE BACK-TO-BASICS MARKET RETURNS” – If you drive value, you’ll drive earnings.  Those that employ operationally-intensive investment strategies will succeed in growing companies of all sizes and industries into market leaders regardless of cycle.  The days of financially engineered zero-growth LBO’s are over.

What will be different in 2010, for the industry and for your own investment activity?

We’re actually far busier today than a year ago and continue to expect increasing amounts of activity in 2010 for those in the position to make new investments not burdened by the demands of an existing portfolio.  There are numerous middle market companies needing capital and operational support to seize opportunities and reach their potential.  The gap between sellers’ expectations and buyers’ ability to finance a prospective transaction has certainly moderated and should continue to do so in 2010.

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John R. Jonge Poerink, Linley Capital

What was the headline for 2009’s private equity market?

“SEPARATING THE WHEAT FROM THE CHAFF.” the macro economic downturn exposes those LBO’s, closed in the years prior to 2009, with irresponsible capital structures and overly optimistic growth assumptions. It is only those Private Equity transactions that were made with reasonable company valuations and conservative leverage levels, that will have survived the macro economic down-turn of 2009 and that will eventually generate acceptable returns.

What will become the 2010 headline?

“THE REEMERGENCE OF DEBT FINANCING.” The slow but sure re-emergence of debt financing for LBO transactions in Europe and the United Sates.

What will be different in 2010, for the industry and for your own investment activity?

Globalization. The effects of the rapidly changing Global Macro Economic Environment and Market Place will play an increasingly important role in separating the good investment opportunities from the bad.

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