EntrepreneursInnovationVenture Capital

Big buyout cycle peaked?

By July 26, 2007 One Comment

Buyout bubble - Forbes cover

Judging by the number of comments I get my posts on the buyout cycle are not the most popular ones on this blog – so I have been writing less of them.  This one is important though (but I’ll still keep it short).
The reason I care about the big buyout cycle is that when it turns I think we will see an increase in cash for European venture.  That is good news for entrepreneurs and over the long term good news for investors as well.   I say over the long term because in the short term increased cash in the market will translate into more competition for deals which isn’t particularly in my interest – but over the long term it is in everyone’s interest to have a healthy and growing ecosystem.

So, the big news yesterday was that banks have thrown in the towel on trying to raise debt for two of the biggest buyouts in play right now – Boots here in the UK and Chrysler in the US.  Guy Hands might also be struggling to get the debt he needs to acquire EMI.

The buyout boom over the last couple of years has been fuelled by cheap debt which has enabled investors to buy companies with less equity and make great returns.  If the supply of debt dries up that equation will fall apart and returns will suffer.  The underlying investors in the buyout firms will then look to invest there money elsewhere and my contention is that a goodly proportion of it will come into European venture.

It certainly should.  The returns are there to be had right now – we are witnessing a wave of innovation and company formation like we haven’t seen for a while and there is plenty of capacity in the market to put more money to work and still generate great returns.