Patrick Lissague, UFG Private Equity

How has the credit crunch affected your sector of the market?

Not as dramatically as our colleagues in the buyout market. Unlike other areas of the economy, the area in which we operate has yet to fully feel the pinch of the current economic crisis. The majority of our operations use little or no leverage and since debt is still obtainable on the scale we operate in.

We are, however, very likely to experience the force of the downturn soon. Smaller companies also are yet to totally feel the impact of larger companies, potential clients and their restructuring plans. Larger companies trimming down means less orders and the like for the smaller companies who then in turn may well be forced to restructure too. Consequently, we are currently experiencing a lag in pricing of certain assets. For example, the winter sales in the retail sector boosted companies' balance sheets for the end of the year and the start of 2009, making companies seem in better health than they actually are. These figures are temporarily keeping major troubles at bay however it is unlikely that these results will be sustained and a knock on effect of that will be felt by smaller companies.

Have government incentives had a positive influence on small companies?

The government funds, including FIP and FCPI, and incentives, such as tax breaks, have indeed been supporting SMEs and helping them through the credit crunch. On the other hand, it has resulted in less visible opportunities for investors. The reason for this is the way these funds are set up; they have a certain quota to invest annually regardless of the economy, they can't just wait for a better time. As a result, the prices of companies within our target range have remained artificially higher. The government reimbursement of TVA tax has also helped inflate these companies, boosting their balance sheets and making them look healthier. The current prices are simply lagging compared with the market on the whole. The full extent of the economic crisis is yet to hit this sector of the market. We will soon see a squeeze for these companies when banks see a drop in results, as credit lines may be cut and restructures might well be needed.

How does one deal with the current economic crisis?

It is important to work closely with the management teams of portfolio companies; a good management team will succeed whatever the economic climate. They are at the forefront of the operation so it is imperative to keep close ties with them. If a problem is to arise, the earlier we know about it the better. Certainly, more mature managers who have witnessed a downturn in previous years may be more apt but that does not take away from the fact that dedicated managers will innovate and find ways to make their firm work. 80% of the time, when a problem arises in a portfolio company it's due to the management, only 20% of the time is it purely the markets fault.

The market on the whole will eventually bottom out, albeit a bit later than other sectors of the economy. There are, however, still obviously plenty of opportunities; it just represents more work since one has to be particularly diligent with target companies for fear of making a bad investment, something LPs will not tolerate in the current climate.

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