Bulls & Bears

Email of the Day comes from Dale: “Dan, you’ve been reliably bearish over the past two years, insisting that the credit markets would eventually stop providing such cheap debt to private equity firms. Then once it finally happens, you begin talking ‘bull’ about how the market will survive, deals will get done, etc. I’ve concluded that you’re neither a bear nor a bull, but just a reflexive contrarian.”

Maybe so Dale – particularly given the previous post. But back to my past bearishness: The concerns expressed weren’t so much about how the credit market would eventually crunch and affect future dealflow, because we all knew that what goes up must eventually come back down. Instead, it was about how the leverage excesses would impair buyout fund returns for limited partners. Specifically, how buyout funds were overpaying because of an abundance of cheap debt.

Even if you accept that most LBO-backed company fundamentals are strong, it will be very difficult to find decent exits for many of the large companies bought over the past 12 months. And this will be a double-whammy for LPs who ramped up PE commitments over the past year, as much of that money has gone not only to mega-funds, but also to mega-fund co-invests.