The End of Optimism

13 February 2009

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When I worked in Oslo my boss was a polar explorer (before hedge funds started doing it as team building), a collector of contemporary art and a book publisher. Whenever we raised concerns about forecasted book sales, he would always reply: "You have to be an optimist. I am an optimist, and things tend to work out." This might be true for the book industry (indeed, his company has grown to be one of the most profitable publishing houses in an otherwise regulated and sedated sector), but could the opposite be true for the financial industry?

Optimism drove valuations through the roof; encouraged ever higher leverage levels; and as a survey by IE Consulting and Coller Capital shows (see page 13), LPs were incentivised to over-allocate, counting on using divestments from exits to fund future draw-downs. With a gloomy exit market, some GPs now fear they won't even be able to make investments this year. Additionally, an investment would require a capital call, which in turn risks rocking the LP boat, a chance many GPs are not willing to take.

Indeed, there has been a dry spell for deal activity in the region. Some would argue GPs are waiting for prices to fall even further, as they have stated since last summer. Some blame the banks, while others again call for more government support. Only a select few remain upbeat. The headlines seem reserved for messengers of doom and gloom, reiterating predictions of a gruesome year ahead.

Historically, the Nordic region lags a bit behind the rest of Europe in investment trends. Even the global credit crunch didn't hit, or at least didn't sink into Scandinavian markets and mentalities, until months after the rest of world had entered panic mode. If the same is true for company outlooks, we are headed for a dramatic year. Standard & Poor's expects default rates in Europe to hit double digits this year and, according to Alchemy's Jon Moulton, an estimated 200 covenant breaches were on the cards among UK portfolio companies for Q4 2008.

For struggling companies, few options exist, and most of those have negative connotations. In the UK, one option is pre-packs, in which a buyer is lined up before the company goes into administration, raising questions about deal transparency and the lack of involvement of stakeholders (its nicknames, "quickie" or "stitch-up", tell all). Needless to say, large PE brand names have been tainted. Traditionally, PE in the Nordic region has enjoyed a good reputation - the question is how long will this last? Will they prove to be the good guys, or the bad boys?

I would like hear your views. You can reach me on the number listed below.

Yours sincerely,

Rikke Lilla Eckhoff, Editor, Nordic unquote"; Tel: +44 20 7484 9824; rikke.lilla-eckhoff@incisivemedia.com.