At the end of last year, Alex asked,

In the last couple of weeks a lot of deal activity has spiked up that was painfully absent for most of the year: both at the larger mid market (eg Apax buying Marken, Carlyle bidding for Shanks, Permira & Just Retirment) and down among the smaller houses (eg Matrix and Inflexion both did multiple deals in December).

… how do you read this and care to make some predictions for 2010?

The significance of size and location (of private equity firms) became clearer and clearer as activity increased in late 2009. We saw many micro firms in resilient economies at full-steam, but also larger global firms reeling from negative press. This isn’t to suggest anything about the quality of nations, or firms, or people, or decisions; it’s just the way the cookie crumbled (if you’ll let me take the easy way out).

Irrespective of size and location, most of us paid too much pre-GFC. I’ve heard many smaller players chastise larger players and congratulate themselves on exhibiting more restraint. But we ALL paid too much at a point, and if nothing else, we should be a little humble after such a display of ineptitude. Sure, there’s no point living in the past, but there’s no point celebrating losses either.

With this in mind, I think the defining characteristic for 2010 will change from size and location to the composition of existing funds. The same way firms couldn’t escape their genetic make-up in 2009, they won’t be able to escape the overhang of under-performing assets in 2010. It may sound somewhat sombre, but 2010 will be the beginning of the end for firms with net negative equity. It will take much more than an uptick in a few economic indicators to restore value, even if just to original purchase prices.

For everyone else, this overhang will still clearly define their deal-making activities going into 2010, but to different degrees. For new funds, I see 2010 as a time of unprecedented opportunity, which will warrant furious deal-making efforts. But the reality is that most of us will be finely balancing our fiduciary duties to existing investees with our determination to capitalise on seemingly unprecedented opportunities.

Above all else though, I think the ingenuity of private equiteers will reign supreme once again. We’ll see countless casualties in terms of companies, shareholders and even private equity firms, but we all know life in a capitalist world is a roller-coaster: ups and downs.

Image: Life is a roller-coaster in a capitalist society [source: Shutterstock]