Credit Crunch Has Become an Excuse

I spent most of Sunday napping, or thinking about napping. It was recovery from a bachelor party that had kept me out until past 3am, and generally reminded me that I’m really looking forward to my annual July vacation. Like past summer breaks, it will involve little travel and lots of couch time. Unlike last year, however, it is unlikely to include any television appearances.

I bring this up to point out that we’re coming up on the one-year anniversary of the credit crunch spreading into the private equity markets. It’s tough to pinpoint an exact date or event, but I use a pair of emails from CNBC producers for demarcation. The first came the week of July 4, and asked me to appear to discuss the “buyout boom.” This was around when Blackstone’s Hilton deal was announced, and topics were to include “the next major target,” “how big can deals get” and other such things. Shiny happy stuff.

The second email came at the tail-end of my vacation (or maybe a few days later), and was a forward of the original email: “We’d like you to discuss what we talked about last time (see below), except the opposite.”

So we’re now more than 10 months into the morass, and most of the PE market still seems stuck. For a while, the banks served as obvious culprit. If sponsors can’t get debt, they can’t do deals. But most of the hung bridges have now fallen or tightened, with just a few outliers remaining (BCE, Penn Gaming, etc.). And the lenders I speak with do seem willing to finance traditional deals again, albeit at pre-2006 terms. So I wonder if the real holdup is now the private equity firms themselves. Not for a lack of liquidity, but rather for a lack of courage.

I can’t blame anyone for being gun-shy, particularly after how difficult some of the past year’s deals have been to close. That said, it is an investors job to invest. For private equity firms, that doesn’t just mean using flexible fund structures to acquire distressed debt – including for one’s own portfolio companies. Instead, it means doing private equity deals. And, if you’re a mega-fund, that translates into mega-deals. That’s what LPs are paying for.

I’m not saying to completely eschew caution. Nor am I discounting the preponderance of CEOs and boards who haven’t yet internalized their company’s drop in value. Instead, I’m arguing that the current deal blockage is largely due to the oxymoronic display of overzealous self-restraint. It’s bruised hearts overwhelming heads that know to buy in a down-market.

This is a curable condition. The entire private equity market takes its lead from the mega-firms (sorry mid-markets, but it’s true), so what’s needed is a few major deal announcements. Not even deal closures yet, just funded agreements. That should prime the pump for most everyone else, and remove the condition of uncomfortable trail-blazing.

Not saying it’s easy, but that it’s certainly necessary. If not, I’ll be spending my July vacation watching TV, rather than appearing on it.