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Home » Blogs » Ken MacFadyen

MacFadyen: A 'New' New Thing?

By Ken MacFadyen, MU Blog

August 17, 2009

In a few days, I’ll be moderating a panel exploring “The 'New' New Thing in Private Equity.” It sounded simple enough when I committed to it, but the more I think about, it’s not that easy to dig up new trends for a market that has been stuck in neutral the past 12 months.

The best “new thing” that I can come up with relates to the role of the asset class. In the recent past, private equity was billed as a driver of value. In the middle market, for example, investors would take a company showing steady growth, put leverage behind it, and exert some positive change. The exit would come after four or five years with returns being driven by earnings growth, multiple expansion and the leverage applied.

It was a pretty good formula, at least until sponsors – in the name of staying ahead of the market – negated two of the three drivers by putting all of the emphasis on debt. 

In its new role, private equity has taken on a janitorial function, cleaning up the mess caused by overleveraged balance sheets. Clayton Dubilier & Rice’s $250 million investment in NYSE-listed NCI Building Systems, for instance, went directly to offset $180 million of debt due to mature in November. And One Equity’s recent $75 million investment in ArthroCare was just as timely, considering the company saw its $100 million credit facility terminated in April. 

The asset class got itself into trouble when there was too much liquidity, but at least some investors are recognizing a role they can play helping clean up some of the damage. Effectively, these rescue capital investments will count on earnings growth and multiple expansion to drive returns. Basically, the “new," new thing for investors is buying right, which seems a bit too obvious to be novel. Either way, it's a good place to start as the market continues to find its bearings.

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