If the current drama does not end with there being only one U.S. bank, one U.S. auto manufacturer and one U.S. insurance company, each of which report to government appointed soviets to make operating decisions, then buyout opportunities will continue to appear. Private ownership continues to demonstrate itself to be the superior method for nursing the future of companies while looking after shareholder interests. The outside board of luminaries that advised A Man in Fuld at Lehman, the Merrill Lynch team and the team at AIG failed to serve as the voice of reason as leverage reached 33 to 1, a level at which no buyout deal nor home mortgage could ever come into being.
The S&L collapse of the 1980’s, the Drexel Burnham bankruptcy, the HLT restrictions, the bursting of the internet bubble all created excellent investment opportunities for patient capital managers willing to spend the time required to clean up problem assets. The sizeable gains following these periods were largely due to buying right, improving earnings and selling at expanded multiples, not due to large dollops of leverage. Certainly the reaction to recent events will be a careful extension of credit, but on a risk/adjusted basis the near term will be the best period for lenders since the HLT period of 1990-91. Sponsor “selection” by lenders will become an important near term lending criteria.
For the long term we are doomed to forget the lessons of history and repeat the excesses of the recent fiasco again.
I’m Rob Morris and I approved this blog.