MacFadyen: PE’s Tin Cup Rendition
July 16, 2009
It’s amazing what a little urgency can do to people’s spending habits. In one short year it’s as if the entire world discovered that Hublots don’t look all that different from certain Seikos or even Casios in a dark setting.
When Quizno’s had its “million sub” giveaway a few months back, one of our reporters here spied five men in suits using the coupons at the chain’s 80 Broad St. location. It didn’t take a gigantic leap to speculate that they probably came from Goldman Sachs’ headquarters across the street. Even Ruth Madoff, who reportedly tried to pass expired coupons at California Pizza Kitchen, is adjusting to a new bank account, one that still has upwards of $2 million.
The mindset in the M&A world isn’t all that different. People will point to private equity’s $400 billion overhang or the cash position of certain healthy companies and wonder why that money isn’t being put to work. What they’re forgetting is that the same concerns that have millionaires clipping fast food coupons are leading investors and corporate decision makers to sit on what they have, even if it’s still a lot by any standard of measurement.
I was speaking the other day with a pro at a mid-market PE firm. I used the term dry powder, and the conversation jumped to how GPs today view their available funds more as a life line that keeps the lights on as opposed to capital that’s burning a hole in their pockets. For that reason, the source said, “very few people are out there aggressively looking for new platforms.”
As far as imagery goes, a bota bag is probably more appropriate than a powder keg under these circumstances.
This is not to say the unease is unwarranted. A lot of private firms may be looking at their portfolios wondering what they were thinking. What’s going to be interesting, though, is how they actually use what’s left of their funds. Do these firms go into VC mode where they start chasing potential home runs as a way to save a fund or will they use what’s left of their capital to demonstrate what their strategy looks like in a normal market?
It’s a tough call, since neither strategy will guarantee the mercy of limited partners when it’s time to raise that next fund. If I had to guess, though, I’d venture that few limiteds are eager to see a PE interpretation of the movie Tin Cup.
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