Reading much of the commentary by various Australian financial market commentators about the genius of private equity and their seeming insatiable appetite for snapping up Australian companies often reminds me of the story of the fawning courtiers around King Canute who told the King he could even command the sea.
Unfortunately even the most brilliant private equiteer cannot command US Treasury yields lower and many of these modern day courtiers will likely turn on their own pronouncements down the track in a manner befitting the last name of Canute’s son, which was supposedly Harefoot.
In fairness to those who are bullish on the long-term role of private equity in Australia, they may eventually be right for the completely wrong reason.
The problem with a lot of the uber-bullish commentary around the current cycle is that at best it ignores the nature of cycles and at worst it shows an astounding lack of understanding of global financial markets and exactly where the cycle is viewed globally by the industry itself.
The trend in Europe for instance is the aggressive hiring of distressed debt bankers and traders at firms such as Goldman Sachs, Morgan Stanley and ironically at Blackstone.
The ratings agency Standard & Poors considers a company to be “distressed” when its bonds yield more than 10 percentage points above a Treasury note.
Yes you have to hand it to these guys. On the one hand Blackstone went public a couple of weeks ago saying a lot of bullish things and on the other they are looking at building up a corporate restructuring division in Europe, in case things start going into meltdown mode.
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As Iain Burnett, the Managing Director of the Special Situations Unit of Morgan Stanley recently said in London: “When the turn does come, it will be unlike anything we have ever seen before.”
Why? Because of the unprecedented amount of leverage or debt that has been utilized in this cycle.
Private equity may indeed play a significant role in Australia for many years to come, but the form it takes may be very different to the one we currently see.
How ironic would it be if the extended role of private equity in the Australian market was driven by private equity firms buying companies from other private equity firms which had simply taken on too much debt when they were purchased in the heady days of the mid-noughties?