Scooting Along

Madeleine zips along on her wheels, a holiday gift to both kids from Natasha. I feel a tad better than the following photograph, thank goodness. Otherwise I straighten out my office for the conclusion of '08 - a good year all around. This the first time I can remember that I do not have a tail-end project or something Big to dig into for the New Year, which a reflection of the times really. Private equity, once thought to be sheltered from the financial mess due to the industry's long-term nature, is going to take it on the chin thanks the the abundence of leverage. The three components of making money from a buy-out (ie, buying out a portion of a company's shareholding; usually the majority or controlling portrion) are earnings growth, multiple expansion (for example, one buys this year for 6X cash-flow then sells next year for 7X), and debt. Well, earnings will be mired down in the recession and multiples have thanks to a direct correlation with the stock markets (private company valuations of course benchmarked to public markets and m&a). Leverage is also gone (credit crisis deary) and in fact now a considerable problem. Many deals have been done with four or five parts debt for each equity, meaning companies are under pressure to make their interest and principal payments in an economic slowdown. If they break their bank covenents, then the equity becomes nothing. Unfortunately the "perfect storm" may reach shore sometime next year and many privately owned, well known businesses will be forced to restructure in bankruptcy or disappear. In the UK, private equity is the largest employer, after government, accounting directly for >1.1 million jobs or 8% of the private sector, according to the British Venture Capital Assoc. Indirectly, these numbers are much bigger.