A lot has been said about the “bridge to nowhere,” but here’s an idea that might be a win/win/win:
Right now the larger private equity firms have raised significant capital that they have little ability to use for what could be some seriously real time. Their choices are to buy things with all equity (not a bad idea, but one I am not sure they will embrace) or find alternative ways to use the capital. They are certainly not set up to go down market in any meaningful way. Aside from the disdain they might have for socializing with the masses (read: the lower middle-market) they don’t have the staff to evaluate and deploy small chunks of capital.
Right now their LPs are probably not too very happy about having made the commitments to the mega-funds in light of the parched liquidity landscape and the jaw dropping plunging denominator problem they are having. The PE commitments fall in the “alternative asset class” numerator which is fast becoming too, too large as compared to the overall portfolio denominator. Further, as the M&A market chugs slower and slower (I refuse to say “has come to a halt”), “distributions” that LPs had counted on to make new capital calls are just not there.
Here’s a thought. Private Equity: Uncle Sam needs you!
Let’s assume that the firms have some flexibility to invest a portion of the fund down market. There are several non-bank providers of capital who are happy to step up to the plate to do deals but need to know they have the funds to do so. Any deal that gets done now has eye-popping returns both in absolute terms and in current carry returns. If the PE funds were to provide even three year bridge money to the best of this breed, they would make excellent relative returns for their LPs, provide some much needed cash distributions, and, arguably, do their patriotic duty to help the country get going again…imagine Big PE with a PR coup!
So perhaps there really can be a bridge to somewhere.
Gail Long is CEO of ACG Boston, a chapter of the Association for Corporate Growth. She previously was an Executive Vice President of specialized banking at Citizens Bank of Massachusetts, and, previously President of Citizens Capital, that company’s $500 million private equity subsidiary.