"Green shoots?" laughed Alice, making a mental note to apologize to Lewis Carroll for such blatant piracy of his intellectual property. "It's no use trying. One can't believe in impossible things!"
"Nonsense, my dear," shot back the Red Queen, waving the latest economic forecasts from the G-8. "Why, sometimes I've believed as many as six impossible things before breakfast."
But Alice wasn't fooled. She knew, you see, that when the finance ministers from the eight leading industrial economies met in Lecce, Italy, on June 13, they'd each expressed a little more caution than the mad monarch of Wonderland might have wished. "There are signs of stabilization in our economies," they wrote. "But the situation remains uncertain and significant risks remain to economic and financial stability."
Yes, the shoots may be green, but shoots of what? The first hollow tubes of Japanese knotweed, cracking the pavements of a derelict warehouse? The succulent jaws of a flesh-eating Venus fly catcher, lying in wait for the fat bluebottles feeding on dead industries?
Economic leaders recognize that unemployment, on both sides of the Atlantic, will get worse before it gets better. The European Central Bank said on June 15 that, in the euro zone alone, banks face further losses of $282 billion. Many businessmen now worry that as part-nationalized banks buy themselves back out of government control, they will once again stop lending to the unpromising businesses they propped up to keep their political sponsors happy. As for lending to private equity-backed businesses trying to leverage themselves into even more trouble ... well, not just yet, thanks.
Then there are the regulatory threats. Will business take off if governments in Washington, Brussels or London insist on reining in banks, imposing higher taxes and placing onerous regulatory burdens on even the smallest private equity firms and hedge fund managers? Very likely the lawyers and accountants will find ways to make deals work -- but not until the new rules are in place. Uncertainty and political maneuvering could cause long delays.
We should not be surprised that amid all this talk of green shoots and early recovery, of sudden signs of strength in the high-yield bond markets and of slightly increased activity in the housing market, dissenters voice more caution and occasional pessimism. Take the recent survey of private equity investors by Coller Capital, a buyer of private equity secondary portfolios. It found that investors expected to see 28% of venture capital firms and 23% of buyout firms go out of business because they could not raise a new fund.
They also believed that one in 10 of their own number, the limited partners, would default on fund commitments.
A study by Cass Business School, part of London's City University, warns strategic buyers to be wary of opportunistic acquisitions of distressed competitors. Not that the study's authors, Maria Carapeto, Scott Moeller and Anna Faelten of the school's Mergers & Acquisitions Research Centre, are focusing on the cloud and ignoring the silver lining. They can see as well as anyone that the situation offers strong companies with healthy balance sheets the chance to put money to work.
But their report, which excludes private equity and looks only at trade buyers, finds deals that rely too heavily on price and timing may pay too little attention to planning and integration. "Buying cheap," they argue, "does not guarantee higher returns to shareholders." By all means believe in green shoots, these studies suggest, but bring the herbicides with you.