TOO much money at risk but too few really profitable investments. That sums up, albeit somewhat crudely, the state of the private equity market in the middle of the noughties.
A survey undertaken just before Christmas revealed that 95 per cent of the industry’s key practitioners were worried that the amount of debt being used to finance leveraged buyouts had reached “dangerous and unsustainable levels”.
There were dire warnings by distinguished figures in the industry such as John Moulton, the founder of Alchemy Partners, that: “If there is any kind of downturn in the economy we will see a spectacular level of failure. The debt levels are without precedent”.
Given the rise in business collapses last year — for example Equifax, the business information specialist, points to 25 per cent more retail failures — especially among smaller companies, the risks to private equity investors are clear.
A vicious circle has developed with these firms borrowing more as growing competition for deals pushes up prices. The damning conclusion is that prices have risen, in many cases, above what the companies are worth. Yet there is a “wall of cash trying to find a home”, says David Baylis, a private equity specialist at Norton Rose, the law firm.
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The market has learnt from the dotcom fiasco about how easy it is to be carried along by the crowd. But bright new ideas will always be looking for finance. The important points are making sure those ideas are properly presented and to the right private equity audience.