I think ‘phoenix’ is a better analogy than the term Vanity Fair used recently in their exposé of Goldman Sachs when it was labelled a ‘vampire’. Both rise from the dead. And there may be those who do believe that financial sponsors (venture capitalists, hedge funds and private equity firms) suck the very lifeblood from the companies they purchase. But in terms of the rise of debt financing for M&A deals, since much of this has historically supported the purchase of strategic acquisitions by corporate buyers, I prefer the term ‘phoenix’.
Just as the phoenix rises from it own ashes after it has (been) burned, the markets have come back to life (see our reporting of this here in our article entitled ‘Has the M&A market returned? Can we start harvesting the green shoots already?’).
What is still missing, however, are the huge amounts of debt-financed M&A, and this may be missing for a while yet. The private equity and venture capital industries are still largely absent from the announced deal flow (notwithstanding the recent purchase by a venture capital group of 65% of Skype from eBay), as are highly leveraged corporate deals. With the debts markets fundamentally changed from two years ago and earlier, this will take further time to change, but change it will. The disappearance of junk-bond financing at the end of the 80’s was a temporary phenomenon and the creative genius of investment bankers will again be applied to the debt markets in the future, even if not immediately and while the structured debt market remains under a microscope in the halls of Westminster and Washington.
Note as well that corporate buyers have been able to access the debt markets. Does this mean that acquisition war chests being filled? In the US, over a third more investment grade debt has been issued this year than last year at this time, and in Europe the figure is closer to 40%.
Some of this WILL be spent on acquisitions, and well over $1 trillion has been raised in just those two markets alone. That’s a large war chest, even if most of the debt is being used for other purposes such as the need to strengthen balance sheets for the core business after all the hits those same companies took in this recession.
Is this another ‘green shoot’?