?In a cash-is-king economy, the perception is that private-equity-backed companies are emerging as key players in the A&D market. But that may be wishful thinking, as the present financial crisis is having “substantial implications” on private-equity providers as well, according to Craig Jarchow, managing director for private-equity firm Pine Brook Road Partners LLC.


“With the IPO markets being closed and the M&A market slowing down at least temporarily, the exits for private-equity firms are pretty much shut down,” Jarchow told energy executives at a Burleson Cooke LLP-sponsored program in Houston.


“As a result, limited partners are not seeing cash distributions that they can reinvest and are suffering from liquidity issues.”


Credit is tightening, even for the creditworthy, and capex budgets are in full retreat, averaging 33%. “The magnitude of the retreat is quite remarkable. The financial and operational implications for E&P companies are profound, the implications for the M&A market are profound, and the implications for private equity are profound.”


Private-equity limited partners include pension funds, endowments and large institutional investors, which allocate assets according to predetermined formulas involving percentages for public securities and alternative investments, such as private securities. As the public-equity part of their portfolios has plummeted, suddenly they are overallocated to alternative funds.


“That means it’s very difficult for new funds to be raised in this environment, and the enthusiasm for capital calls is reduced as well.”


He knows of large, well-known private-equity investors that have their foot on the brake. “That’s a substantial implication for us.”


Before the crisis, private equity was abundant as “everybody and their dog were private-equity financiers” and exits abounded for entrepreneurial junior companies that built a set of assets and wanted to sell.
“Nowadays, those exits are limited.” And for the financiers? “We’ll see who’s left standing—it may be just the dogs.”


Also, where private-equity- backed companies have each needed a relatively small amount of equity due to strong cash flow, each will now need more funding, “which means we’ll have fewer companies in our portfolios.”


Can viable deals be done in this environment? “You really can’t without strong, liquid hedging markets and strong debt markets. Those opportunities are pretty much off the table.”


As a result of the current economic environment, private-equity-backed companies will likely retreat to a more traditional “growth-equity” business model, taking a longer-term approach of six to seven years versus the two- to three-year model, and in which business building is approached one equity check at a time. “We’ll see much more of this type of investing going forward.”

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