Slow Deal Making Leads To Bigger Problems For The MM

December 15, 2008

It would be easy to point at the big deal-focused private equity firms behind the collapsed buyouts of BCE and Huntsman as the latest victims of the mega-deal, or multi-billion dollar transaction era, or the case that middle market dealmakers are far better situated to deal with the current economic downturn. After all, smaller deals require less debt, making them easier to close when senior financing is hard to come by.

Middle market transactions may be easier to finance as a rule of thumb. Yet, the firms behind mid-sized deals aren’t immune from the problems faced by the mega-market buyout community. Private equity executives and investment bankers foresee a wave of bankruptcies and restructurings for over-leveraged portfolio companies that financial sponsors, large and small alike, acquired during the M&A-industry’s latest boom. And, if the value of an operations-focused private equity business model wasn’t clear before, it certainly is now.

I believe, however, there is a bigger worry facing many middle market investment banking and buyout executives this holiday season: a job. Long known for paring the corporate ranks of portfolio companies, buyout firm partners have started thinning the ranks of their own. American Capital and Behrman Capital, two well-established East Coast private equity firms, have reduced the head count at their respective firms, mirroring the actions being taken by global behemoths such as The Blackstone Group, Carlyle Group and 3i, among others.

It turns out that investment professionals once thought vital to a firm’s operations are as vulnerable to cost-cutting measures as administrative personnel.

The immediate savings might make sense in the world of corporate rightsizing, though I’m afraid the damage may ripple beyond the livelihoods of the buyout industry professionals affected. By having fewer managing director and principal-level dealmakers, private equity firms will have less support to re-jigger troubled portfolio companies, source transactions and handle due diligence on prospective acquisitions. Of course, these challenges can and likely will be absorbed by a firm’s remaining staffers, many of whom may experience a return of sorts to their investment banking roots by putting in longer hours.

Even so, it makes one wonder what kind of long-term “value creation” will be generated by this short-term measure. If the managing partners of buyout firms are truly concerned about that oft-talked about concept, they might want to think carefully about the managing of their own firms. After all, it takes people to create value.