Granahan: PE's Power Play
June 8, 2009
Over the past week the National Hockey League has not been shy about letting us all know that the television ratings for the Stanley Cup are up about 30% from last year. If you are one of the 18 people actually watching the Cup finals, you may very well be aware of this.
Is this reason for the league to celebrate? Well, sure, growth is better than contraction, especially whenever we're talking about hockey and TV ratings. But the reality is that the NHL needs better news than that to turn its fortunes around.
I was thinking about this after seeing some data this week regarding private-equity overhang -- the difference between what PE funds have been able to raise over the past couple of years and what has actually been invested. It's now at $400 billion, an all-time high, and pros in the M&A world point to this as a sign that a PE-led buying binge may be around the corner. Some even boldly cite the fourth quarter as when the shopping spree will start.
But try to rein in your optimism. While it's nice that there appears to be a handful of arrows in the quiver, there is also a compelling, if not groundbreaking, explanation as to why all that money is sitting on the sidelines: Not much looks attractive at the moment.
Remember, even at a time when we already knew the economy and the debt markets were in the tank, there was no shortage of optimists saying that the deals, particular for strategics, would be too good to pass up.
But the reality has been far different, whether it be the result of unrealistic seller expectations, lack of financing or simply the business of the target company falling off a cliff.
"Dealmakers have to put down their pencils and dispense with historical spreadsheet analysis," said David Cohn, a managing director at Mosaic Capital and a member of the Alliance of Merger and Acquisition Advisors, which helped author a study on the overhang issue. "History now tells private equity little about the future."
True enough, but one thing we can say about the future is that it has the potential to be starkly different from what the PE industry had grown accustomed to in the early part of this decade.
More regulation, dicey tactical allocation decisions and the possibility that the commercial real estate market is teetering are just some of the issues that will need to be grappled with. Hopes run high, but reality may get in the way.
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