The Art of Looking Up, But Not Too Far

May 16, 2008

I seem to find myself forever in search of the “happy medium.” You name it—politics, religion, food. Extremes have come to define our culture, in all its obese, bulimic glory.

And the financial markets, which see elation one day and misery the next, certainly don’t qualify as exempt from this. You have your bull; you have your bear. Nothing mythical like a half-bull, half-bear—a beall, perhaps, or a buar.

So I have to admit I found it refreshing to come across optimism tempered with a healthy dose of realism when I popped in on a one-day private equity conference held in New York this week. The event, The Fifth Annual Private Capital Symposium, presented by The Deal, offered a number of panels featuring private equity players, leveraged finance bankers and others, and the theme I picked up on was: Yes, the market shows signs of improvement, but let’s not hurdle ahead of ourselves.

“You’ll see us walk before we can run. It’s going to take a while to get back to where we were before 2006,” said Alan Jones, co-head of private equity at Morgan Stanley. “We’re still in the crawling phase, and it’s going to be a significantly long time before we see deals in the $10 billion to $15 billion size range.”

Jones, like others, spoke with a glass-halffull mentality about the future, but not with the über-optimism (or the contrary) that you often find at these events. He said that he doesn’t expect returns from the 2006 to 2007 deals to be strong, but that 2008 and 2009 should make good vintage years for private equity. And the middle market will kick things off.

Indeed, participants on a middlemarket panel, as well as those joining Jones on a general panel, kept returning to the theme of middle-market strength.

“We’re in an environment where bigger is not better to get deals done,” said Adam Sokoloff, head of financial sponsors and the private capital group at Jefferies. “The reality is that there is a lot of money out there. The idea is to be a little more creative in how to put money to work.”

Still, panelists agreed that for the middle market, or any market, the general economy is the key. “It’s easy to sit in a room with a bunch of private equity and leveraged finance people and feel better about the last few weeks, but every CEO is not feeling better,” said Mark Kramer, a managing director at Fenway Partners. “There’s still a lot of skepticism, a lot of fear.”

And somewhere in between the fear and the optimism, there lies a nice, healthy, happy medium.

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