The chairman muses on the wide impact of the credit crunch, including its effect on private equity. But this does not stop him marvelling at the rewards of this particular investment science.”What sort of world are we living in when you can’t even trust the Germans any more?” sighed the chairman of the impassively-sized investment company Second Coming Asset Management as we enjoyed a couple of pints of Always Proofread An Open Letter at The Straight Forward Manor, which just has to be a budget hotel somewhere off the M4.
“Obviously, the Icelanders were always going to, ha ha, get cold feet – as I believe I may have said once before, good at cod, less good at banks – but the Germans? It’s a sorry state of affairs.”
“Still, one thing you have to admire about this credit crisis,” I replied. “It doesn’t play favourites, does it? Countries, sectors, companies – you name it, the crunch wants to kill it.”
“I’d say it goes even further in its even-handedness,” the chairman observed. “After all, I’m struggling to remember the last time a financial crisis was quite so damaging to the theory of baskets, eggs and general diversification. Your basic staples of shares, bonds and property have all been spanked but so, by and large, have alternatives such as commodities, hedge funds and private equity.”
“Interesting point,” I replied. “And I’m glad you mentioned private equity because – at the risk of revealing my ignorance two weeks in a row – I fear I have misunderstood how that particular investment science works. You see, I’d rather formed the impression, admittedly a while back, that private equity had an in-built safety net because those involved, well, knew what they were doing.
“I thought there were these big pots of money, funded by investors great and small, which were used to buy out businesses where the potential had been identified for the right people to do many splendid works – or, at the very least, run things a bit better. Then these same right people were shipped in, worked their wonders and the businesses were sold on at a profit.
“However, I can’t help but notice that doesn’t seem to be happening at the moment. Indeed, if I didn’t know any better, I might conclude – and obviously I’m speaking generally here rather than with reference to any particular business, whether or not it used to employ me – private equity funds ended up with too much money, bought assets at the top of the market and are now really hurting.
“To put it another way – and in complete contrast to what I had until only recently believed – private equity types really haven’t a clue what they’re doing.”
“Speaking as a private equity type, we prefer the term ‘more money than sense’,” the chairman replied. “Not least, because for the middle part of this decade we’d have to have had the IQ of nuclear scientists for that not to be true.
“What’s more, I confess myself staggered at your naivety over private equity. Perhaps that’s how things worked in some magical pixie land that may or may not have been the 1990s – or possibly just in theory – but that isn’t the way to make money now.” “So how do things work?” I asked. “Well, there are variations on a theme,” the chairman replied.
“The way we do things at ScamVest is we buy the company, use it as collateral to take out a huge bank loan or loans, immediately pay ourselves an equally huge dividend and then rationalise, synergise and make the remaining staff work flat out to service the interest payments. Then we float, trade-sell or whatever and make a mint. If it all later crashes – well it’s not our business any more. Literally.”
“Building a strategy around bank debt in the middle of a credit crisis doesn’t seem to be the way to make money now either,” I observed. “Still, I’ve one other question – how does private equity differ from private market investing?””Ah – bit of a touchy subject that,” the chairman replied. “Scam’s just come up with a rather delightful little offering in that very arena and – would you believe it? – my own flesh and blood down at Huxley Epsilon, the self-proclaimed future of financial advice, says he’ll fire any employee who recommends it. I mean, seriously, does he really think he knows more than I do?”