Karma Chameleons

“If we had a perfect portfolio management, we’d sell every company that we had right before we went into recession, be completely in cash, buy everything again low and ride the cycle up. So bad times for us are not bad times the way they are for regular people.” So said Steve Schwarzman, Blackstone’s head honcho back in May 2006 on the Charlie Rose Show, where he also reminisced with co-interviewee and Carlyle co-founder David Rubenstein about how close their companies came to imploding before they started, both closing debut funds a week before the market crashed in October 1987.

Despite the “mania” at the height of the recent boom, Schwarzman added: “We all expect at some point for the cycle to turn down and for us not to be as happy campers as we are now”. Indeed, the mood appears to be more decamp than happy camp of late, with fund managers presumably spending their time Facebooking one another and watching the tumbleweed bobbing along the streets of Buyoutsville.

According to one recent report, global deal values dropped by more than a third in Q3 of this year and there is a reputed US$300bn pile of underwritten debt commitments. Private equity is an opportunistic animal, however. “The greatest time to invest is when prices are low and people are afraid of selling things or afraid of financing things,” said Rubenstein, back at Charlie Rose. “Our business is to buy businesses at low prices.”

This could explain why Emap was underwhelmed by pricing in this week’s first round bids, reportedly including a £2bn tilt by Cinven for its business-to-business and consumer magazine units. Trinity Mirror chief Sly Bailey’s position is in question after selling The Racing Post well below the cover price and cancelling the sale of Trinity’s regional titles for the same reason, so Emap’s management could be forgiven for standing its ground for now. But there are bound to be more attempts by private equity to buy low, especially as more businesses realise that the market has changed and so must pricing. Whether Cinven or any other private equity house could finance a bid upwards of £1bn in the current market is easily dismissed, but there, private equity can help too.

There have also been moves by the likes of Kohlberg Kravis Roberts, among others, to raise funds to buy up the backlog of leveraged loan commitments – at a price; meaning private equity gets to have its cake, eat it, and then charge the baker for taking it off his hands. Whatever its critics say, the move may help clear the way for the banks to start financing new deals such as Emap.

The point Schwarzman and Rubenstein were making back when private equity was approaching the apex of the boom is that the industry, or at least those in the top tier, is built to survive and not just adapt to but also exploit the peaks and troughs. Not so much locusts as cockroaches then, although it’s probably not a trade the PR-challenged industry would support. Chameleons, perhaps.

Robert Venes