Back to the ‘90s

For many people the phrase “green shoots of recovery” has been tainted since Norman Lamont, then UK Chancellor of the Exchequer, used it to talk up British growth prospects in October 1991. While his assertion has since been proved quite prescient, it was at the time viewed as laughably optimistic.

The phrase, however, is experiencing something of a comeback, with little buds being reported in residential housing markets, equities markets and even consumer confidence indices.

Toby Mitchenall

Whether these green shoots are rooted in a deeper trend or just statistical anomalies remains to be seen, but if they do foretell of an imminent recovery, the revival, like the green shoots themselves, could take us back to the ‘90s, according to European mezzanine lender Intermediate Capital Group (ICG).

The firm believes that when the local primary markets eventually reopen, conditions will resemble those of the mid-1990s. Banks, which are becoming more nationally-focused and increasingly nationalised, are sucking money back to their local markets, according to ICG managing director Tom Attwood.

In the mid-1990s the market was characterised by local mid-market transactions executed by local private equity players. Deals were financed by local banks at reasonable levels of gearing.

And gearing is what it is all about. The arrival of credit fund managers in Europe en masse during the late ‘90s provided the fuel for the so-called “golden years” of private equity. It also meant that by the end of 2006, institutional investors accounted for a greater share of the European primary loan market than the banks.

According to data from Standard & Poors, there were three loan fund managers in Europe in 1999 accounting for about 5 percent of the continent’s buyout debt. Eight years later there were more than 100 managers accounting for around 60 percent of the buyout debt market.

This is all going to change, says ICG. Of the new wave of managers of CDOs and credit hedge funds, most have no track record, little or no cash; nor prospect of raising any. Most will leave the market in the near future – Attwood predicts 90 percent of participants will have left the market in five years’ time – and some already have.

With many credit fund managers disappearing, it falls back to the banks to provide liquidity for the buyout market. In their current state, however, it is hard to see this happening any time soon. For the few debt providers that manage to survive, therefore, there should be some rich pickings among the ‘90s-style green shoots.