Thursday, April 2, 2015

Listening to Markets and Hearing Government

Readers of this blog know that Joe and I are strong advocates of listening to the market - being aware of current conditions and opportunities.  Certainly, in structuring a deal we must contend with economic reality; a situation suitable under one set of economic conditions may be far from optimal in another.

Many analogies and cliches apply - e.g., play the cards you are dealt.  The best quarterbacks in American football learn to read the defenses and take the best opportunities.  So too should we read the market and find the best solutions.

In the best of situations, markets reflect the economic equilibria of competitive forces.  But alas, they also reflect governmental restraints.  The Wall Street Journal recently published a very interesting article showing the impact of government activity on deal flow.  The article, entitled, "Buyout Firms Feel Pinch From Lending Crackdown" suggests that regulatory guidelines favored by the government are impeding deal activity and deal design.  In particular, the author notes that regulators urged banks to avoid putting debt greater than 6 X EBITDA in most industries.  Further, "So far this year, 21% of U.S. private-equity deals have been financed with leverage at or above levels regulators generally consider risky..." down from 35% last year.  The chart below (from the WSJ article) captures some of these dynamics.

The merits of this regulatory guidance is a subject for another debate, although regular readers can guess where our feelings lie on the subjects of free markets, free choice and the law of unintended consequences.  To be fair, Joe and I have both warned of the dangers of highly leveraged deals and over-excited markets, but we prefer to take things on their merits and consider things in context to all of the other factors that go into structuring the deal.  One size rarely fits all.    But like it or not, the regulators are part of the world we mentioned and hence, their impact must be factored into our decisions.

All the best,


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