Extraordinary: LP defaults

17 November 2008

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Signs of panic are ubiquitous. The Bank of England has just slashed interest rates by 150 basis points to 3% - their lowest level in 54 years. All this seems to have achieved is to confirm fears that the situation is indeed dire, while doing little to drive banks into action. From a private equity perspective the fall-off in leveraged loans across Europe amounts to a 60% drop off in the first nine months of 2008 compared to the same period last year. This has been accompanied by a simultaneous but unsurprising increase in equity contributions - up around a third on average to the 45% mark

None of this should surprise unquote" readers. What may, however, raise a few eyebrows is panic-stricken limited partners. Faced with overexposure issues in today's market, some are reacting like deer in headlights. This has led to the obvious reaction: a swathe of secondaries. Indeed, anecdotal evidence suggests that deals worth more than $45bn have been completed in this area already this year - 50% up on $30bn across 380 transactions completed over the whole of 2007. Happy days for secondaries specialists and their advisers.

But there is a less rosy scenario that could emerge: undercapitalised (or under confident) LPs defaulting on capital calls. GPs could find themselves sending out letters and waiting a long time for cheques to arrive, something that is already beginning to happen in rare cases. Should it become prevalent, a new raft of products will have to be considered at the fund structuring stage - and a new form of "emergency secondaries" could come into play. Expect big-brand funds-of-funds to be called in to fill gaps - some are already doing this proactively. Extraordinary times indeed.

Yours sincerely,

Kimberly Romaine

Editor-in-chief, unquote"

Tel: +44 20 7004 7449

kimberly.romaine@incisivemedia.com