DLJ chief sees ‘slow crawl’ back to deal activity in 2009

A panel of private equity insiders, including DLJ Merchant Banking chair Nicole Arnaboldi and Carlyle's Jonathan Colby, agreed the buyout industry is in for more pain but sees US deal activity regaining momentum sometime next year.

The credit markets will loosen up and deals will start flowing again by the end of 2009, but not before the private equity industry experiences severe contractions and pain through the holiday season, according to several buyout specialists who spoke at a conference in New York Tuesday.

“It will be the second half of 2009 before we see any meaningful activity in the US,” said Jonathan Colby, managing director with The Carlyle Group.

Colby's sentiments were echoed by panelists Nicole Arnaboldi, chairman of DLJ Merchant Banking Partners; Martin Mannion, managing director of Summit Partners, and Bruce Bowden, Nokia's global head of M&A.

Carlyle is making sure its portfolio companies are preparing to weather the financial storm. “The lean winter favours the strong,” Colby said. “We’re shutting locations, laying off temporary workers. . . the operating perspective has become absolutely critical.”

Arnaboldi said that next year the industry will have “a slow crawl back … it’ll start with smaller deals, it will start in the mid-market”.

“There’s still pain to come,” agreed Martin Mannion, managing director of Summit Partners. “We’re telling our portfolio companies to assume no new revenue growth. Most of our focus is in the mid-market and we’re building our operating management group.”

Mannion said he expects shrinkage in the industry as smaller private equity firms that aren’t able to raise new funds disappear.

Despite the turbulence, Mannion and Arnaboldi said they expect some great acquisitions opportunities amid the troubled markets.

“We’re still putting money to work in the BRIC countries,” Colby said. Arnaboldi added: “There’s still enormous consumer demand in play in countries like China and India.”

The current environment also has Credit Suisse’s secondary fund busier than ever, she said. “At discounts of 35 percent, there’s not many who are selling. But some [limited partners] have to sell.”

Carlyle recently closed a €530 million European technology fund. DLJ closed its most recent fund on $2.1 billion in 2006, focusing on investments using $20 million to $200 million of equity capital. Boston-based Summit closed two funds in April – a $1 billion Europe private equity fund and an $825 million subordinated debt fund.