Why is PE considered a "cyclical industry"?
I've heard this excuse many times in the recent news from firms describing their recent drops in profits. I understand how a credit crunch and an unexpected crisis could cause a decline in business; aside from unexpected, extremely rare events, what accounts for the cyclicalilty of PE? It probably moves parallel to the economy (boom in economy = more business = more deal flows), but what are some factors that account for the cyclicality of the economy? (I understand how one-time events [i.e. budget deficit from current government] might affect the economy, but I don't see any assuredly recurring events events that could cause a recurrent, predictable cycle).
What the fuck are you talking about?
Private equity, in and of itself, is not cyclical. However, the underlying credit cycles in the debt markets (which drive entrance and exit multiples) are cyclical.
This is why private equity returns are somewhat cyclical.
I understand this, but why are the credit cycles cyclical?
Are the ups and downs associated with contractions in lending during low times (such as the present) and, after these low times clear, credit is more readily available, leading back to high times?
If so, how does the economy generally fall back to the low part of the cycle? I understand the current crisis with the rising tickle-rates leading to unpayable loans... but I'd assume that the same mistake generally will not be repeated. Do low times always follow some sort of "unexpected mistake", or are there relatively set durations of highs and lows?
this is a good answer
Go read a book on economics. The business cycle. It exists. It isn't a perfectly predictable cycle, simply a pattern of ups followed by downs.
I would guess that a lot of the deals PE do involve leveraged buyouts. In a credit crunch, borrowing money gets more expensive. That's where it's from.
This is certainly true, though in practice the decrease in leverage levels hurts equity returns (or at least your ability to pay up on price) quite a bit more than do increased interest rates (of course, the two are related).
I recall reviewing a GS auction in the early summer that had initially offered staple financing at 8.0x LTM EBITDA. However, in late July the staple got pulled and replaced with 5.5x turns, which clearly had an impact on transaction value as the target went to a strategic for ~9.0x.
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