Morning:
8°c
The British Venture Capital Association deserves some marks for chutzpah.
Tomorrow, throughout the day and evening, it will be hosting a bash in London for 800 members and guests in the presence of various of the great and the good, whom it boasts will include Lord Myners, the CBI's Richard Lambert, Brendan Barber of the TUC and Karren Brady until recently chief executive of Birmingham City Football Club.
At the dinner, the BVCA will give awards to the chief executives of portfolio companies those financed by private equity. It is the first time it has gone down this route, and it is part of a plan to celebrate the successes of private-equity and venture-capital backed companies throughout the UK.
This last comment may raise the odd wry smile because generally speaking the private-equity industry is not having a good war. The low-profile firms that financed small business and focused on improving the operations rather than on debt-driven financial engineering are still doing some good work below the parapet albeit for much more humdrum returns but it is carnage among the high-profile firms. The reputation of the industry as a whole has taken a hard knock. Investment bankers and restructuring experts who have been called in to sort out some of the most obvious casualties among the over-leveraged top-of-the-market deals complain that the private-equity houses are not much good in a crisis.
They may have decided to buy a portfolio company that now finds itself in trouble, they may have played a part in devising its strategy. But the complaint from the restructuring specialists is that private-equity houses have no idea how to sort out these problem children as they buckle under the mountain of debt.
As a generalisation, that is probably true but there are exceptions, particularly among those private-equity houses that still have capital to invest which admittedly excludes most of them and comes down largely to those who had just completed a fund-raising before the markets broke.
They make a contribution because they can inject new funds. In contrast, a private-equity house without cash to invest is a bit of a waste of space and can't really disguise the fact.
The industry that survives this shake-out might well be very different. Most private-equity houses are in a semi-permanent state of fund-raising, and those who have failed to deliver decent returns in their current funds which looks like being the majority of them will struggle to get new money in the future.
Investors must surely also be more discerning next time round and refuse to back those houses that added little to what they bought other than leverage, and could only turn a profit when markets were rising so they could offload it all again at a higher price. They may well begin to look behind the hype of performance charts and the smooth-talking dealmakers to see if the private houses are actually structured as a proper business should be with functional management, risk controls, leadership, succession planning, coherent business disciplines and all those other boring but rather useful things.
Going into the credit crunch, many of them did not which is one reason several of the most famous are coming apart at the seams and will be hard-pressed to make it through the night.
There is an irony in this that should not be lost on potential investors. There has probably never been a better time to invest in private equity than now. It was the deals done in 1992 in the depths of the last recession that turbocharged the performance of the industry last time round.
It is the deals that will be done in the months to come when these difficult markets and adverse economic conditions throw up some genuine bargains that will be the bedrock of performance in the future. Most people will miss it though, because right now all they can smell is their own scorched flesh.
Cause for alarm over Cameron
If, as appears to be the case, the City really believes that the independence of the Bank of England is a good thing, it ought to look hard at this extract from David Cameron's speech at the Conservative Party conference in Manchester last week.
Banging on about the economy, he said in part: If we spend more than we earn, we have to get the money from somewhere. Right now the Government is simply printing it. Sometime soon that will have to stop because in the end printing money leads to inflation.
Well, the point is that it is not the Government that is printing money, nor is it the Government that took the decision to print. It is the Bank of England. Likewise, it is not for the Government to say when quantitative easing will or should stop again that is the Bank of England's call. That is what independence means.
There are perhaps two things to be gleaned from this. Either Cameron plans to bring the Bank of England back under Government control, or he still does not fully grasp what is being done by whom to cope with the financial crisis. I leave it to readers to decide which is the more alarming.
