On the rocks

01 December 2008

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All the chit-chat nowadays is about how no-one will close a deal before Christmas and that vendors want silly sums for their businesses. The deal-doing world is largely on hold, and with it, the community that advises them for handsome fees. Furthermore, around three quarters of private equity-backed businesses are thought to be behind target. There is now increasing strife between LPs and GPs as the deal-doing cogs have ground to a creaky halt

They are likely to stay that way for some time, since it is no longer just sellers' out-of-touch price expectations and a jammed-up leverage market holding things up. If only. Now GPs face pressure from their investors, and this could see the market remain frozen even after banks re-open their doors.

Limited partners are galvanising to pressure GPs, even those with funds already closed. Expect a few funds to shrink as investors renege on commitments - not just defaulting at the capital call, but collectively approaching GPs to ask that the calls are made smaller and less frequently. SVG is politely doing this with Permira; others with less cosy relationships may be less civil.

Also expect deal volume to remain low as LPs, concerned with where the asset class's returns are headed, prefer to 'wait and see' than to witness their money deployed in deals that may wobble. So concerned are LPs that in some cases they are seeking written agreements that GPs will not deploy more than a certain percentage of their fund in a 12-month period. So concerned too are GPs that LPs will default on draw-downs, that some are now re-assessing their own rate and types of deals in order to avoid a showdown in the first place.

This is the point to which LP/GP relationships have crumbled. A shame, since 2009 and 2010 are likely to prove outstanding vintages for those willing and able to put money to work.

Yours sincerely,

Kimberly Romaine

Editor-in-chief, unquote"

Tel: +44 20 7004 7449

kimberly.romaine@incisivemedia.com.