I’m hearing it a lot lately; it’s a great time to be buying and an awful time to be selling. This roughly translates to, it’s a great time to be in the embryonic stages of a PE fund, but a not such a great time to be anything else. But, what happened to the dangers of catching falling daggers?
There aren’t many guarantees in life, but fortuitously, there’s a guarantee that it’s not the top of the cycle for PE firms to be buying. Sure, the economic atrophy can continue, and financial markets currently resemble cosmic black holes, but at least there’s the comfort of not buying at the top. Ipso facto, you could do a lot worse than make investments in this market.
As for making a call, I see the current state of the market as a double-edged sword. The lucky PE firms will find great businesses with owners whom are worried enough to sell at lower multiples. But, I also think we’ll see a spate of rushed deals based mostly on the pretence of low multiples. Of course those multiples may look low now, but if earnings fall… well, let’s just say they won’t be so low anymore.
The other limiting factor of many current deals is the mud-like flow of debt. For smaller deals that don’t require syndication, this certainly isn’t insurmountable. The cautious and prudent move at this stage would be to limit gearing to maybe 2-3 times of earnings, provided cash flow still exists.
Overall, I think it’s a great time to be looking for deals in mid-market private equity, but certainly a risky time to be rushing into them. Business owners aren’t exactly capitulating, and those that are, probably run businesses that private equity firms would rather stay well clear of. With that said, I’m sure there are a few diamonds in trouble that just need a little extra polishing to reflect their true light.