Buyouts Panel Notes

Yesterday I moderated a buyouts-focused panel here in Boston, as part of an ACG Boston event. Around 550 folks showed up, which was quite impressive given the lousy weather. We talked everything from deal-flow to recession to credit to PE PR. What follows are some notes, in no particular order:

*** The panel included two investors from mega-buyout shops (Josh Bekenstein of Bain Capital and Jill Greenthal of Blackstone Group), and two investors from upper-middle-market/large buyout shops (Kevin Callaghan of Berkshire Partners and Marty Mannion of Summit Partners). We talked a lot about the dichotomy, including the question of whether or not mega-firms and large firms would begin competing for the same deals – particularly given that no one expects many $5 billion+ deals in the near future. The answer was negative from all involved. That may mean that the large-market firms move a bit further downstream, but the primary argument was that the Bains and Blackstones of the world can’t justify too many $100 million or $200 million equity checks.

*** Middle-market buyout shops have been hit hard by the credit crunch, despite much crowing to the contrary. The conventional wisdom had been that covenant-light structures had only been extended to mega-firms, but both Callaghan and Mannion disputed that assertion. They also pointed out that the middle-market lenders are now having far more troubles than had been originally expected, despite their non-syndication strategies.

*** Covenant-light is dead. But I think we already knew that.

*** Bekenstein had the line of the afternoon, in response to a question about access to leverage: “It’s easy to borrow at 0x EBITDA. Any higher than that is very difficult.”

*** All four panelists believe we either are already in a recession, or will be in one by year’s end. I also asked that question of the audience, and only one attendee played contrarian. From my calculations, that’s 99.9% who expect recession.

*** The panelists agreed that private equity has done a lousy job of PR over the past year, although Greenthal emphasized the catch-up formation of the Private Equity Council. I asked the middle-market folks about why they don’t have any lobbying representation, particularly since there are so many more of them than there are mega-funds. Marty Mannion’s response was revealing: He cited the carried interest tax situation, and how venture capitalists tried to cleave themselves off from the mega-buyout folks. Middle-market investors, Mannion said, haven’t been able to decide which side they’d like to align themselves with.

*** We talked a bit about internal accounting, since PE firms are now required to mark-to-market. This is something the big firms have done for a while without incident, but there is definitely some apprehension among the mid-market ranks.

*** Greenthal suggested that one reason for reduced deal-flow is that public companies haven’t yet internalized their reduced stock prices. There’s a lag, she said, which means that a company trading at $25 per share might not accept a $32 per share offer – because it has a 52-week average of $31 per share. That could take another six months to shake, she said. Kind of reminds me of VC-backed entrepreneurs after the Internet bubble…