I’ll be on CNBC’s Squawk Box program this morning at 6:20am, ostensibly to discuss what sectors will be favored by private equity firms in 2008. But I’d expect most of the conversation to revolve around how firms would handle a bear market, which is looking increasingly likely with yesterday’s global sell off and where U.S. futures are currently sitting.
So a few quick thoughts: (1) Private equity firms will return to their pre-2006 knitting, which means zeroing in on industries that are underperforming. That may mean “everything” today, but I’m talking longer-term plays like financials. For example, PE tried getting involved in many of those bulge-bracket bailout deals that ultimately went to sovereign wealth funds.
(2) The flip side to cheap buys is a dearth of exit opportunities, particularly via IPO (which was already soft in 2007). There also could be some M&A troubles ahead, if global sellofs result in a reduction in corporate cash-on-hand. So expect a major increase in sponsor-to-sponsor deals, particularly for companies that aren’t too heavily-leveraged.
(3) Finally, a bear market could drive down private equity fundraising. One reason for the record tallies of 2005-2007 was that institutional investor caches kept rising, thus boosting the real dollars associated with a 5% or 7% alternative allocation. Well, it also works the other way, which could mean fewerreal dollars available.