Pirates of Private Equity Flying Colours Off Australia’s Shores

Garn! What’s this? Are the Pirates of private equity flying their colours off Australia’s shores again? Yes! At least according to Ari Sharp in today’s Age.

“The energy, mining services and financial services sectors will soon appear on private equity’s radar as sharemarket turbulence drives down prices, according to a leveraged buy-out consultant. Ernst & Young private equity leader Bryan Zekulich says sectors that have historically had low levels of private equity involvement are now more likely to be sized up.”

The Pirates headed for port last August when the credit storm started blowing. Doing deals with borrowed money got a lot harder last year. But this year, some of the private equity firms are doing deals with cash. And unlike last year, the market is full of good companies with not-so-good share prices.

“We expect to see PE [private equity] take advantage of good buying opportunities created in the current economic uncertainty – basically sound but temporarily distressed assets that investors have lost faith in, but these opportunities have the potential to yield high long-term value,” he said.

Much to our chagrin as a share tipper, the junior miners and small caps have been absolutely smashed so far this year. But it’s interesting to note that cashed-up players are starting to kick around the small cap and resource rubble. They’re looking for something that can be salvaged, picked up, dusted off, and sold off down the track for a gain.

But what exactly are the private equity firms looking for? In the resource sector, Al Robinson over at Diggers and Drillers tells us to look for the three Ps-people, projects, and prospects. “Good people don’t usually get involved in bad projects,” Al says. “Most of the time in markets, it pays to follow the money. But with the miners, you follow the people.”

“But I reckon what the pirates are after are good projects they can buy at a discount. With commodities prices doing a major correction and taking share prices with them, it’s going to leave some amazing projects really vulnerable to opportunistic players. I’m watching for takeovers…and I don’t really care who’s doing the taking over. As long as we’re in good projects, we should do alright.”

While the pirates or private equity are hunting the juniors for booty, the indexes will probably follow Wall Street’s Friday lead and head up. The Dow finished Friday up over 300 points. Oil fell another four percent to US$115. All this despite another multi-billion dollar loss by Fannie Mae.

It’s amazing how markets can sometimes defy the news cycle. But it’s generally wise not to second guess the market-unless the market is totally rigged (which is hard to prove, although watching the S&P futures is a good place to look for this sort of thing). Still, it’s as if the market is cheerfully convinced that as bad as things are, they can’t get much worse.

But they did get worse this weekend. We just don’t know how much worse yet. We ended last week’s Markets and Money with some thoughts on how long the current crisis in central banking could last. We wrote that, “Here we are eighty years later dealing with the same problem. How will it end this time? Which will come first, the Depression, or the War?”

Notch a victory for “war.” It’s hard to tell exactly what’s going on in Georgia at the moment. Without going into too much geopolitical detail, the Russians have invaded a disputed area in Georgia and are having their way with the tiny country.

But what if they held a war in a vital energy corridor between the oil rich Caspian Sea and the West…and the oil price did nothing? That’s what it looks like so far. The only non-Russian oil and gas pipelines from the Caucasus to the West go through Georgia. There is clearly an energy angle to this latest conflict, whether or not it is what lit the fuse to the whole thing.

More on this subject tomorrow, with some detail. For now, we should point out how confusing a time it is for the Nation State as an institution. It is getting both stronger and weaker at the same time, depending on where you find it and how it generates revenues (taxation or resources).

In the West, you have governments gradually going bankrupt as their populations age and they devote more and more of their resources to health and pension promises they will not be able to keep without much higher levels of taxation. These institutions simply can’t meet the needs of their people any longer, and sooner or later, that failure will be obvious.

Meanwhile, authoritarian capitalism (saw the term in the paper last week and liked it) is on display in both Russia and China. In Russia, energy profits power the resurgent state. In China, the government is putting on a show for the world: here’s what a command economy with lots of energy can produce.

It sure was a gorgeous opening ceremony, though. Say what you will about the current Chinese government. But let’s not forget Chinese culture is over 5,000 years old. As destructive as it is to the human spirit, not even communism can ruin that much tradition. Beijing looked fantastic on Friday. It’s too bad the rest of the world seems to be on fire.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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