SWORD admits that P/E faces its own set of challenges, and one is access to capital.
“I think the P/E market is like no other at the moment … no other that we’ve known. It’s a market in flux. Change is usually good for P/E whether things are on the way up or down.
“During periods of change, you would expect to see quite a lot of P/E activity. We’ve not seen it yet.”
Nor is it likely until, as signalled earlier, P/E changes its ways, too.
“I think you’ll see a different kind of P/E emerging.
“Take the traditional buyout … debt package, P/E package, buy a business, run the business and then sell or IPO it. That market has changed, and for a long time ahead. There’s no IPO market today and there are few buyers out there for P/E-backed vehicles either. Therefore we have to assume that we’re going to hold these vehicles for longer, so we have to have a longer-term growth strategy. Then there is the issue of debt availability. It’s not just the corporates that can’t access debt markets; P/E is struggling to access debt markets, too.
“P/E had a good run over the last few years, and a lot of that return has come from financial engineering. I think its more fundamental now. People have to be backing and working with companies to genuinely grow them … grow the earnings, actually grow the top line, improve margins, improve cash flows. It has to genuinely be about business building now.”
If that’s the case, then isn’t P/E in danger of stepping into sovereign wealth fund space? Sword agrees that sovereign wealth is potentially a formidable player – witness the emergence of Taqa in the North Sea.
“What we will have to do is work more closely with corporates. I think you’re going to see two types of P/E deal emerging … all equity, so no leverage. You’re going to see people putting in equity to grow companies … there are good companies out there, but perhaps their balance sheets are in need of repair. You’re going to see quite a bit of P/E working that way.
“On the other hand, I think we’re going to see some quite interesting combinations of potentially strategic players combining with P/E. I think you’re going to see some operators out there that say, ‘actually, I’ve got an interesting plan, but I don’t know how to fund it. Public markets aren’t open, debt markets aren’t open. Is there a like-minded P/E player’. The strategic operator will provide all the operating skills and the P/E business will provide access to capital and perhaps some innovative ways of funding.
“So I think we’re going to see quite a few interesting JV types that have not been seen previously in the North Sea.”
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