Friday, January 16, 2009

Private Equity to Make a Comeback in 2009?

An article in yesterday's Wall Street Journal notes the TRILLION dollars of dry capital that PE funds have under commitment.

Putting aside any issue as to whether the LPs will honor their commitments in this economic environment, this is a huge amount of capital sitting on the sidelines. You have to think that with equity (and debt) prices as depressed as they are, there are large nubers of appetizing targets out there. Heck, there are plenty of public companies that have an equity value that is less than their cash on hand. If you could get a bridge loan (no small task) you could basically buy these companies with their own cash.

However, there is also the reality that the high yield debt markets will simply not be there to support $1B plus buyouts which means the middle market is where the focus will be.

The PE guys that I talk to (the ones that aren't having other problems) agree with this sentiment, but feel that there is a disconnect between the valuation that the target's management thinks they are worth and the valuation the current equity markets would impute. The former may be at 9x EBITDA while the later may only be at 6x. However, there will be pressure on this gap fom both sides, the PEs need to start deploying funds and targets at some point will need liquidity events.

The long and the short of this is that middle market PE backed M&A could really go on a tear in the second half of 2009.

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Dividends and Preferences by Hank Heyming is licensed under a Creative Commons Attribution 3.0 United States License.