Playing the end game

15 March 2007

Its boss, Bill Conway, believes the boom won t last much longer. He wants downside protection and will accept lower returns on deals. Trouble is, buyout investors are only interested in whether a fund s performance is top quartile. For the moment, they re ignoring risk.

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William Conway, a founding partner and managing director of the Carlyle Group, wrote in a memorandum to the private equity firm's investment professionals dated 31 January 2007 that this excess liquidity, leading to huge amounts of relatively cheap financing, will continue for at least the next 1224 months. If liquidity ended tomorrow, I would want as much flexibility as possible – are our covenants loose enough? Have we hedged against a sharp upward movement in rates? Can we draw down on our revolving credit loan facilities?

Conway concludes, we should redouble our focus on deals with downside protection – asset coverage, multiple and early exit paths, strategic partners, the aforementioned debt paydown, government protection, consumer needs (coffee and donut?), controllable capital expenditures, defensible market positions, etc.

A link to the full text of Conway's memo is found below.

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