Guest comment: Bubble riding in the buyout world

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These are different days, with different opportunities, says Jon Moulton, founder of private equity firm Alchemy Partners.

From the early 2000s until the summer of last year was an extraordinary period in the buyout world. The winning strategy was to bid the most for any company put up for sale and pile in as much debt as you could raise.

This bet relied upon even more debt being available a year or two later. And the bet kept coming home, enabling buyout firms to get huge dividends and to sell companies to other buyout firms at even higher prices driven by more and more debt.

And as everyone in the game was making ever more money, it carried on. Bubble riders began to believe themselves geniuses (actually, on reflection, some had always believed this).

But the bubble relied on the same debt structures as the US sub-prime mortgage market and Northern Rock. When the US mortgage companies abandoned quality control the whole lot collapsed.

Credit has become rare, banks worry about themselves and each other. Debt, in risky quantities, is not available. Simply, large buyouts are not going to happen often in the next few years.

What of the buyout firms' portfolio companies? Well, those with debt at eight and 10 times operating profits (last year's!) are clearly struggling to pay interest and maintain enough cashflow for their businesses. Some will be in trouble with their financiers.

Add-on acquisitions will be harder to do - the banks want to get their money back, not to increase loans to fund acquisitions. And raising more debt to get out of trouble is totally out of fashion.

Consequences

1. Weak returns for buyout firms are inevitable for the next year or two. Investor interest will decline.

2. Portfolio companies will need more work. Financial and operating restructuring will become commonplace.

3. Fewer new deals - less work for lots of people.

And now the economy is slowing down... Different days.

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