The stock market has never gotten along with politics particularly well, and this week it’s been really cranky. The DJIA and S&P 500 both dropped 10% from their highs, fulfilling the definition of an official correction. The markets haven’t been this spooked since the early days of 2009, when there was widespread fear that banks would be nationalized.
Those concerns now seem quaint by comparison. The euro is fighting for its life and upending European markets. The U.S. equity markets were kicked in the stomach by the flash crash of May 6, which seemed to end a six-month-long long bull rally. Wall Street reform legislation will drag on until July 4, as the House and Senate try to reconcile their bills. Even if no more crises happen after that, the summer slowdown will kick in.
What does all of this mean? Well, we likely won’t see very many private equity-backed companies coming to market until at least September, unless they’re strong enough to weather volatile markets. Conventional wisdom would dictate that money managers may be wary of buying new shares of newly floated companies while they’re trying to manage the massacre in their existing holdings. Six companies already have postponed or withdrawn their IPOs just since the flash crash.
There are litmus tests coming in the form of PE-backed companies scheduled to price in the next couple of weeks. The first is American Capital-backed Mirion Technologies, which makes radiation detection equipment and hoped to raise up to $187 million next week.
If the markets do continue their tremors until September, that will be bad news for private equity firms, many of whom are on the road fundraising this year. It’s harder to raise a fund without showing returns, and PE firms can’t show returns without finding an exit. IPOs have been the favored exit route of several PE firms, including Carlyle Group, which doesn’t appear to have sold a single significant portfolio company in all of 2009. The equity markets and M&A markets have been completely unwelcoming for any kind of exits for over three years.
On the bright side, auctions and club deals appear to be making a resurgence. If that activity somehow seems untouched by the global crisis, PE firms may still be able to find a way out. But strategic buyers are likely to be concerned about their stock prices and managing through the global crisis too – particularly if they have any international operations – and that may freeze some activity.
Normally, private equity firms could always find a brave bank to underwrite a public offering in even the worst economic conditions. But, this time around, the banks have their own problems. This means that PE firms are in a real bind due to forces outside their control )again). It only remains to be seen whether limited partners will be at all sympathetic.