Private equity firms suffering from depression

Private equity practitioners used to be in the vanguard of regional capitalism, supporting small businesses as they grew bigger and gearing up to achieve a large return on capital employed. But now they are sunk deep in depression.

The Private Equity World Middle East 2009 conference this week attracted a good crowd and many sponsors. However, the gloom and despondency among delegates and speakers is tangible. Why are these canny business operators so depressed?

Double-dip recession

Basically they do not believe in the recovery and see a double-dip in the global economy as stimulus packages are withdrawn. The current uptick has left businesses too highly priced and their owners overconfident in the opinion of private equity firms.

At the same time the long term practitioners of this black art have balance sheets stuffed full of business stakes whose value they no longer believe in themselves, although they are reluctant or unable to sell them off on the cheap.

It is ironic that low interest rates from the Fed have fueled up stock markets around the world since the lows of March, but have not translated into new bank facilities for private equity firms. Banks are still slow to lend because securitization is still largely frozen.

You have to wonder if the private equity firms are not just seeing something that others are not. They are generally perceptive and well informed investors, and need to be in handling the risk profiles of often rather small companies.

Is the much heralded recovery just an illusion? Is business going to suffer a second blow from the unwinding of the crash? Will stock markets correct and fall again?

Eye of the storm

Terra Firma’s Guy Hands told a similar conference in Paris recently that he saw the global economy as being ‘in the eye of a storm’. Hands is one of private equity’s most famous and successful operators, even if he has dropped a clanger buying EMI.

For those who do not know their latin ‘Terra Firma’ translates as ’solid ground’. Hands has been in business for a long time and used to trade secondhand cars and art when I knew him at university.

We once debated the real value of money in the Oxford Union late one night. He always had his feet firmly on solid ground then, and I doubt he is far wrong now.