In Search of a Silver Lining ...?

“The bigger the boom, the bigger the bust,” so the saying goes; it’s 18 years since the UK economy last recorded negative growth so the boom looks pretty big in retrospect. The bust has so far lived up to this billing with banking bailouts, stock market crashes and a housing market in freefall.

The ‘real economy’ has yet to exhibit more than minor symptoms of this heart attack in the financial system. However, despite the promises of old-style Keynesian pump priming from government, and aggressive interest rate cuts around the world, it seems unlikely that the textbook symptoms of increased unemployment, business bankruptcies, negative housing equity and mortgage repossessions will be avoided.

These symptoms represent a very real and personal cost for many people and I doubt that anyone is looking forward to 2009 without at least some sense of foreboding.

The road ahead is shrouded in black, recessionary, storm clouds; is it possible to detect even the slightest silver lining?

One glimmer, however indistinct, might come from a most unlikely source: the private equity industry.

Private equity investors have only just been overtaken by investment banking bosses as top of the list in the corporate bad boy stakes. So bad has the PR image of the industry become that the daughter of one of my colleagues has taken to telling her friends that her father is a tax inspector to avoid social embarrassment.

Private equity is, in essence, very simple: the idea is to buy shares in a company and then sell them at a later date for a profit. During a boom, the plan, if not its execution, is relatively simple. Buy a company, usually using significant levels of bank debt, and use the profits of the company to pay down that debt before selling the company into a rising market, making attractive returns for the shareholders.

Recent events mean that bank debt is no longer available at anywhere near previous levels, and there are not many stock market bulls to be found these days.

A new plan is needed, and this needs to focus on growing the value of the company from the inside, rather than relying upon leverage and constantly rising stock markets to drive value.

The industry will need to back management teams with the vision and ability to grow their companies, using some of the cash flow that would previously have been used to service bank debt to fund investment in new products, markets, machinery and skills.

If successful, this strategy will not only provide a good return on investment; it will also build sustainable businesses, creating employment and wealth for many years to come.