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Conway warned that the cheap debt private equity firms have been thriving on is likely to be history in the not-too-distant future, saying, "The longer it lasts, the worse it will be when it ends." Conway, directing his memo to his p.e. peers at Carlyle, stated, "Frankly, there is so much liquidity in the world financial system, that lenders are making very risky credit decisions.
This debt has enabled us to do transactions that were previously unimaginable, and has resulted in generally higher exist multiples than entry multiples." When Conway says "us," he literally means deals involving his own firm, including the $15 billion buyout of Hertz and the $18 billion Freescale deal. In preparation for the eventual fall, Conway offered three recommendations:
--"If the excess liquidity ended tomorrow,
I would want as much flexibility as possible - are our covenants loose enough? Have we hedged against a share upward move in rates? Can we draw down on our revolving credit loan facilities?" he asked. SEE LEON BLACK, APOLLO
--"Second, liquidity has led to a significant reduction in risk premiums - most investors in most asset classes are not being paid for the risk being taken. Our strategy should evolve to take lower risk deals and earn lower returns." SEE HENRY KRAVIS, KKR
-"Third,
we should redouble our focus on deals with downside protection - asset coverage, multiple and early exit paths, strategic partners, government protection, consumer needs, controllable capital expenditures and defensible market positions," he said. SEE PRIVATE EQUITY, ORIGINAL BUSINESS MODEL
