Silver Lining of Not Closing

Conventional wisdom is that equity sponsors are desperate to see their “hung” buyouts close, in the face of crunched credit and the corresponding possibility that certain banks might jump the bridge. And I don’t doubt it – as no one wants to put several months of work into a deal that falls apart due to macro-market factors.

But here’s a thought: It might be better for certain firms if these deals do, indeed, fall apart. The majority of them are overpriced, particularly in light of falling stock prices. Moreover, the favorable leverage terms are disappearing (see Alliance Boots), which largely negates why those price premiums were offered in the first place. Finally, let’s assume that all of the deals do close. If so, a handful of brand-name funds would face dry powder shortages.

In other words, closing bad deals today could make it more difficult to do good deals in the future.

This might not be the case were we still in January, but the 2007 fundraising rush has left many limited partners with a dearth of available allocation. This is particularly problematic for mega-funds in search of large commitments. Just today, Buyouts ran a story about how Bain Capital beating the bushes a bit harder to get its new $15 billion fund raised.

Not a crisis by any means – and European and Middle Eastern LPs might be the saving spigot – but certainly a flip side worth considering.