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In a week when one of our largest charities, the Wellcome Foundation, has invited bids for its £3.8 billion (£2.6 billion) private-equity portfolio, when the American giant KKR - the original barbarian at the gate - sold a large chunk of its own portfolio at a discount and both Carlyle in the US and Permira, one of the biggest British houses, sent a message to potential investors offering help should they struggle to meet their funding commitments, it becomes pretty obvious the stresses of the credit crunch are biting in this sector too.
It is an arcane area, but in the good times providers of capital to buyout groups got into the habit of overcommitting - offering 150% of what they had available in the hope that when the time came they would have the money. They are now seriously embarrassed.
In many ways that is to be expected. So much of private equity's success was rooted in debt being cheaper than equity, because this allowed them to buy stock market-listed companies on the cheap and gear them to the hilt. So much too depended on having easy exits - either selling the investments back to the stock market, or more often selling them to another private-equity house willing and able to stuff in even more debt. With credit no longer available, they can no longer do big deals.
With the stock market in the doldrums and only hard-nosed trade buyers around, they find it difficult to sell their existing investments. So all that can be brought to bear is the ability to deliver operational improvement to the businesses they own. That was always thinner on the ground than they liked to pretend, and it will be harder still to deliver in an ailing economy.
But the discomfort of the large houses is not typical of the whole sector. Electra reported yesterday and looks in remarkably good health. But there are reasons for this, the principle one being that it saw the crash coming - or at least that the good times would have to come to an end - and positioned itself accordingly. It sold a lot of assets near the top of the market, bought resilient defensive stocks at home and abroad and purchased the mezzanine debt.
But more important than all of these, it accumulated its own private cash mountain so it will be able to take full advantage of the opportunities that it believes will shortly be around in abundance. It and others that have proved equally nimble and farsighted - Ian Armitage's HG Capital springs to mind as another which has been piling up the cash, as does Jon Moulton at Alchemy - all in their different ways see the coming recession as the dawn of a golden age for their business.
There will be good business available at good prices from distressed sellers. There will be opportunities to take direct equity stakes, which they will have to themselves because they have the cash and the stock market is effectively closed. Above all it will be cheap. Contrast, too, their good positioning with that of 3i, which was still chasing estate agencies as possible acquisitions long after the peak of the market and is now paying the price.
There are other opportunities. Much of the debt used to fund buyouts in recent years now sells in the second-hand market at between 50p and 80p in the pound - and some a lot less than that. Enter Tom Attwood at ICG, and several others who are beginning to buy the debt cheap in some of these highly leveraged companies and will then probably use their holding as a platform to restructure the corporate balance sheets - most probably by stripping out the gearing via debt-for-equity swaps.
The idea is that this will leave them with a comfortable share stake in a business which will have a much lighter debt load going forward, so it will probably prosper.
...and Moody's brings hope, too
The good news is that the vast majority of the good-quality, non-financial, non-utility corporate bond issuers in Europe, the Middle East and Africa (Emea) will ride out the storm in the credit markets with some discomfort but not too much difficulty. The bad news is that the analysis on which this conclusion is based comes from the ratings agency Moody's.
Cheap jibes apart, this examination of the liquidity challenge facing Emea's top companies is an interesting and reassuring piece of work. It is geared to the top end, partly because it tends only toward the bigger companies which have done the bond issues that have put them on the Moody's radar, partly because the firm looked hard only at the top 375 rated B2 and above.
That gave it a universe of 210 investment-grade and 160 speculative-grade companies. But its key finding was that even if the banks refuse to renew any of the facilities scheduled to fall due in the next 12 months, 80% of the firms in the survey would sail through, covering their needs from cash flow, and without recourse to selling assets.
The figure for companies that rely on commercial paper and could survive the total drying-up of that market was even higher. Even those in trouble may not be in real trouble because the analysis assumes cash would still be allocated to dividends, share buybacks, capital expenditure and so on, whereas in reality if the going got tough, these would be curtailed.
So while no one thinks it is going to be easy, neither need it be as bad as the continual gloomy headlines suggest.
