We have tried to focus on businesses and industries that are more recession-resistant and stable, less cyclical and less asset-intensive, which comes from our strategy of driving returns from operating improvements as opposed to betting on a cycle, technology, product or particular customer set. We implemented that strategic focus a long time ago, but it is even more apparent as a positive given the period we're in.
Many people are convinced that the current economic downturn will be deeper and more prolonged than we've seen in any of the more recent cycles. It is clearly an asset to have a full-time internal team of operating partners – in our case former corporate CEOs – who have, in a sense, been there and done it before.
From a new deal standpoint, in the near term there definitely is a constraint resulting from the lack of leverage available. Leveraged lending will come back very selectively and will take a while, but we think it will come back in a very advantageous way to CD&R. Lenders and debt investors are going to be much more selective, and our operationally driven model will be attractive. We also think that, to the extent that sellers are forced to assist in the lending for a transaction, they too will favour a CD&R-type model, which is deeply grounded in getting cost and productivity gains and generally improving the fundamental operating performance of businesses.
We've got four or five years of liquidity to fund operations at each of the portfolio companies, even if they are cash-flow neutral from operations. When you have leveraged companies without covenants, what will trip up a lot of businesses will be access to cash. We very deliberately built liquidity cushions for each company we acquired when the sun was shining and the sky was clear, which has turned out to be a very valuable insurance policy in today's environment.
The liquidity also is a real asset as a source of funding for add-on acquisitions. Many of our companies are looking at whether now is the time to play offense, not just defense. The choice being debated is “buy or bury”. It's not a pretty term but sometimes you can take business away from competitors on a more capital-effective basis without buying them.
In a macro sense, Europe's transaction sizes tend to be smaller, the syndications are tighter and that may help the market recover a little more quickly. There is a more developed mezzanine market so some of the smaller transactions should happen. We closed a transaction in Europe, Bodycote Testing Group, in October with about 55 percent equity. To make a broad generalisation, there may be more balance sheet capability in Europe right now than in the US relative to the size of the markets.
However, there's a real lag between the credit and fiscal programmes in some of the European countries versus the US, so there is a continuing lag in terms of when they see the bottom and when the recovery comes in individual European economies.
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