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Harry Newton's In Search of The Perfect Investment Technology Investor. Harry Newton

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9:00 AM EST, Thursday, April 16, 2009. File this one under Nothing Wall Street invents is working. I own a little of the Goldman Sachs Vintage Fund IV. It's a private equity fund made up of discounted slivers of other people's funds. The idea was that buying private equity at a huge discount -- because someone or some institution needed desperately to sell -- gave huge returns in the long-term.

My December 31, 2008 account shows I'm down only 4% on the year. But Goldman says when they finally figure it out, I should be down an additional 13% to 18%. So maybe 22%. That's their "best estimate." They explain:

Private equity has clearly been affected by this challenging environment. By the fourth quarter of 2008, acquisition financing was essentially unavailable, which led to a dramatic slowdown in new deal activity. Additionally, exit alternatives were severely limited as the public markets were essentially closed for initial public offerings an both financial buyers and strategic buyers were more inwardly focused and generally unwilling to consider acquisitions. Lastly, it has become increasingly clear that the economic downturn has directly or indirectly affected the performance of nearly every portfolio company.

Global M&A (mergers and acquisitions) volume fell more than 29% in 2008, to $2.9 trillion, from record high volumes in 2007. In addition to contributing to the reduced aggregate level of activity, the lack of available financing disproportionately affected sponsor-backed activity. As a result, private equity's share of global M&A declined from a 2006 high of 19% to just 4% in 2008. On a dollar volume basis, leveraged buyout (LBO) activity was the lowest since 2003. As in previous years, public to private transactions accounted for a significant portion of that LBO activity, 66% by transaction value. From 2004 through 2007 recapitalizations of companies owned by private equity funds exceeded $20 billion annually, generating significant dividend payments for funds and their LP's (limited partners, like me). That source of proceeds evaporated in 2008, with just $1 billion in recapitalizations; there were no recapitalizations in the second half of 2008.

The dislocation of the global credit markets which began in the second half of 2007 led to severe de-leveraging (paying off debt) across the leveraged finance investor base. This de-leveraging, combined with an "overhang" of transactions to which private equity firms and banks had made financing commitments (the leveraged loan forward calendar peaked at $237 billion), created a massive technical imbalance in which demand for capital far outstripped the overall supply. These technical issues were exacerbated by relative value pressures in the investment grade, loan and high yield markets. As a result, from record-setting volume in 2007, leveraged loan volumes fell by 71%, to $155 billion; high yield issuance fell by roughly the same percentage. This was a trend that had begun at the end of 2007, with volume in the second half of 2007 down 57% from the first half of the year. Private equity-related leveraged loan volume fell by 98%. In 2008, pricing moved up just as dramatically as volume moved down, with leveraged loan spreads ballooning 812 bps (basis points) to 1,122 bps.

After peaking in 2007, valuations for private equity began to decline as the credit which facilitated lofty valuations dried up and as falling public equities created downward pressure on valuations. On average during the year, buyout firms paid 9.5x trailing EBITDA for companies with EBITDA over $50 million, down from 9.8x in 2007. By the second half of 2008 valuations has dropped further to 9.1x, but with few transactions taking place that number likely understates the extent to which valuations have adjusted downward. There is widespread agreement in the private equity industry that values will continue to fall and that those participants with fresh capital are eager to invest at valuations that reflect the new valuation environment, the uncertain economic times we are experiencing as well as the limited supply of debt capital. Deal size also changed dramatically in 2008. The largest LBO (leveraged buyout) of 2007, TXU, was $44 billion whereas the ten largest buyouts announced in 2008, combined, were valued at $35 billion.

While venture capital funds were buoyed by a strong IPO market in 2007, that market was virtually shutdown in 2008 making it a difficult year for venture capitalists as many planned public exits were postponed. There were 6 venture-backed IPOs in the U.S. in 2008-the lowest since 1977-raising $0.5 billion, down from 86 IPOs raising $10.3 billion in 2007. In fact, there has only been one venture-backed exit in the last three quarters. In 2008 venture-capital investing declined for the first time since 2003, down 8% from 2007; the number of deals dropped as well, by 4%. Clean Technology was the one significant growth area for venture capitalists, representing seven of the ten largest venture-backed investments, increasing by 52% in dollar volume.

After a second record setting year in 2007, private equity fundraising declined to $465 billion in commitments, down 6% from 2007. The fundraising environments has, however, changed more dramatically that those figures suggest. Quarterly data tells a more complete story of the magnitude of the change; fourth quarter 2008 commitments were down 66% from the first quarter. In addition to the slowing pace of commitments, in an unprecedented move, a number of major funds have allowed their LP's to scale back their existing commitments.

The broader economic and financing environments have had profound impacts on private equity managers and their portfolios. General partners recognize their portfolio companies need to be prepared for an extended downturn and are working closely with their management teams to aggressively manage costs while closely monitoring liquidity needs. As weaker participants in each industry falter, general partners are trying to position their companies as the survivors and future winners although it is unclear when the market environment will again be conducive to growth. While there are instances where underlying portfolio companies are able to take "offensive" (rather than "defensive") actions such as making acquisitions, such activity is more the aberration than the norm. Generally speaking, private equity investors recognize this is a time for their companies to survive rather than take meaningful operating risk and are instructing their managers to act accordingly.

All this is nothing new. It's just depressing when you see your miserable investments with Goldman and see their employees getting $10 billion or so in bonuses. For what? For losing me money?

The magazine business also sucks. Circulations are plummeting. Ad are going for quarter price. Misery and desperation abound. I buy a DVD from Amazon and receive this email:

Thanks to your recent DVD purchase you can now get up to 5 magazine subscriptions at 50% off each. No promo codes needed and no strings attached, the discount will apply automatically at checkout.

And the prices are cheap. My benchmark has always been $1 an issue for a monthly -- like Esquire. But now Esquire is $8 for the year. Harper's Bazaar is $8. Good Housekeeping is $8, etc.

Magazines are going digital, too. You'd think they'd be real cheap -- since the cost of delivery is almost zilch. But... go on Zinio's site (they're the leading provider of digital magazines) and you'll find the same magazines at the exact same price as the paper edition. I'm not a big fan of digital magazines since turning pages and zooming in to read them is sooooo slow. Also you can't mark articles that interest you, though you can print them. Now, if the publishers got their wits together and dropped their digital prices dramatically, I might get more interested. Is anyone listening?

P.S. I used to publish a dozen magazines. That's how I made my money. So, I know what I talk of. For a change.

The cell phone danger. Your cell phone is a tiny PC. It can be infected with bugs and viruses. People can listen in on your conversations and hear what you're saying -- even if you're on the phone. I wouldn't get overly freaked But you should be aware. For more, this YouTube video is semi-interesting.

Sharon sent me this. She comments she never found this "humor" funny -- until recently.

Nice wife. Actual conversation, yesterday April 15, 2009.

Harry: Would you like to go to the movies this evening?

Susan: Yes. I'll be with you in a moment.

Harry: Excellent. I'll pick a movie and buy tickets.

Susan: No, you won't.

We never did go to the movies last night. We fell asleep.

The big Talmudic question
After many years, a young Talmud student who had left the old country for America returns to visit the family.

"But - where is your beard?" asks his mother.

"Mama," he replies, "in America nobody wears a beard."

"But at least you keep the Sabbath," Mama asks.

"Mama, in America, business is business. Everybody works on the Sabbath."

"But kosher food you still eat?" asks Mama.

"Mama, in America, it is very difficult to keep kosher."

The old lady ponders this information and then leans over and whispers in his ear, "Isaac, tell me, are you still circumcised?"

The Private Examination
A man goes to the doctor to get a prescription for Viagra.

The doctor says, "Viagra can be very dangerous. We do not dispense it indiscriminately. Please bring your wife to my office next week."

The next week the man shows up with his wife.

The doctor asks to see the wife by herself for a few moments. She follows him back to the examining room.

The doctor asks her to disrobe and she does. He then asks her to turn around a few times, jump up and down, get on the examining table and to turn in various positions. He then tells her she can get dressed and goes out to her husband.

"Sir," the doctor says, "there is nothing wrong with you --- I couldn't get an erection either!"

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.