Postponed casualties

02 November 2009

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At the beginning of this year, The Boston Consulting Group (BCG) issued the headline grabbing statistic that 20-40% of buyout firms would go bust. Everyone was talking about it at first. But as the year draws to a close, the predicted industry shake-out is yet to materialise

Quite the reverse in fact: Moulton's newly formed (though likely long-in-the-making) Better Capital is the latest of a handful to spring up. Indeed in the second quarter of this year, IMAS recorded a doubling of the number of FSA authorisations for private equity companies. They included Stanley Fink's new venture, which is set to hit the road for funds this quarter; BriceAmery, a shariah-compliant fund; and Deutsche Bank's former cleantech team.

There are many reasons for the apparent uptick in firms. Firstly, all downturns spawn spinouts, as disenchanted individuals feel their fortunes are too far off and they can do things better themselves (or they're made redundant). Secondly, some firms were pronounced dead before they truly ceased breathing. Permira is a shining example of this, largely written off by Schadenfreude-stricken competitors, it went on to become one of the most active players of the year (see page 20).

The third reason is less rosy and may yet prove the BCG figure correct, albeit on a longer term basis: private equity firms take a long time to wind down. That Candover is still achieving lucrative exits is testament to this; indeed the buyout house may in fact prove that, though wounded, survival may be on the cards. But for many - and mostly those that have so far avoided headlines - it will be a long road ahead.

This will become more apparent in 2010 as the real brunt of the crunch is felt, even as the wider economy shows signs of improvement. Most deals structured in the boom time have yet to reach critical status as regards their debt, while most LPs haven't yet felt the pressure they'd anticipated since a dearth of deals made capital calls scarce, which makes a wave of defaults (and a subsequent secondaries tsunami) likely.

All the talk of renewed confidence, greater visibility on earnings and a fresh window for IPOs is uplifting, but may be premature. The best placed will be those with ample capital to deploy and minimal portfolio issues, and that is likely to be far less than 60-80% of the GP universe.

Yours sincerely,

Kimberly Romaine

Editor-in-chief, unquote"

Tel: +44 20 7004 7526

kimberly.romaine@incisivemedia.com.