Private equity's public anxiety

Credit crunch, possible U.S. recession looming large

The private equity giants who have bankrolled the studios and bought some of the world's most prized media assets over the past few years are in for a rough ride.

According to the PE heavyweights attending the three-day Super Return private equity conference in Munich, which concluded Thursday, the worldwide credit crunch and a looming U.S. recession will put a major dent in dealmaking over the next 12-18 months.

David Bonderman, founder of buyout group TPG, told the Super Return crowd that he expects the volume of private-equity deals to drop 40% this year, compared with 2007's high-water mark, when PE-driven buyouts totaled a record $715 billion worldwide.

And a number of recent deals could go sour as the credit crunch makes it harder for PE companies to service the debts they took on to finance big buyouts.

"You will see the collapse of some big companies controlled by private equity groups, both this year and next year," predicted Jon Moulton, a managing partner of U.K. private equity group Alchemy Partners, a view shared by many at the Super Return conference.

It's anyone's guess whether some of the big media groups bought up during the PE boom — think Germany's ProSiebenSat.1 and Kabel Deutschland, U.K. production group All3Media or cinema chains Odeon and UCI — will be part of the coming cull.

In order to ride out the downturn, PE companies need to change their focus, from flipping assets for a quick profit to becoming more hands-on and truly improving the businesses they acquire, argued Guy Hands, CEO of Terra Firma Capital Partners.

Terra Firma has been hands-on at music label EMI, which it acquired for $4.8 billion last year. Last month it chopped 2,000 jobs at the label and is moving to change the way EMI signs recording contracts with talent.

Relativity Media's new $500 million co-financing deal with Universal also shows a more hands-on approach than was seen in PE-financed slate deals in the past. Relativity will have the power to co-greenlight pictures with the studio and, according to Relativity head Ryan Kavanaugh, will participate "from the top down" on every aspect of financing and production (HR 2/27).

Many of the private equity execs attending the Super Return say they hope to ride out the current crisis, doing smaller deals and shifting focus to companies in emerging markets such as Asia and the Middle East.

But despite the present doom and gloom atmosphere, most attendees in Munich were upbeat about the PE industry's long-term future.

"It's always darkest just before dawn," said David Rubenstein, co-founder and managing director of PE giant the Carlyle Group, who predicted that the industry will soon bounce back.

Reuters and DPA contributed to this report.