Editor’s Letter – July 2004

Happy times are here again for the leveraged finance markets. After three years of bankruptcies and deteriorating credit conditions, companies are having an easier time paying back their loans. According to Moody’s, the junk bond default rate dropped to 3.4 percent in May, the lowest level in five years. Just 12 months ago, the default rate for junk bonds was 6.7 percent.

Buyout firms may cheer credit turnaround, but distressed players, who figure prominently in this month’s issue of Private Equity International, take a different view. In conducting our roundtable discussion with six distressed debt gurus (p. TKTK), we heard nostalgia for the distressed market of 2002 and 2003, when, as one participant put it, ripe, distressed watermelons could be found among the peaches. Even major distressed players have now migrated to middle-market strategies for the time being, but our patient vulture capitalists said today’s robust lending environment means credit bumpsin- the-road lie ahead. This issue also explores two markets that have been drawing increasing interest from private equity investors in recent years – the Middle East and Canada.

Staff writer Colm Gilmore surveys the variegated investment environment across the Middle East and discovers a pioneering class of general partners eager to deploy capital in the region.

In June, I traveled to Montreal and Toronto to learn more about three important Canadian pensions, called by locals, respectively, la Caisse, Teachers’ and OMERS. Though at different stages of development, all three institutions stand as examples to similar investors across the world of how public pools of money can do it themselves, so to speak – invest directly in private companies and participate in their growth without paying fees to GPs. Success here lies in resolving that great bugaboo of public pension private equity programmes – compensation.

This issue also gives an overview of Canada’s buoyant buyout and venture capital markets. On the later subject, Art Janik looks at the country’s controversial “labour-sponsored” venture funds, much beloved by taxpayers and the managers of said funds, but resented by independent venture capitalists. When I informed a Canadian private equity insider that we planned to write about this politically touchy subject, he cautioned, “be careful.”

Advice taken, but not, we believe, to the dilution of this and many other interesting topics covered in the issue of PEI you now hold.

Enjoy,

David Snow