The world press is loudly debating a bubble in the private equity sector, yet this assumption is rather bold; I’ll tell you why… The jitters about the PE sector that have been expressed in the recent past rely on the fact that large private equity firms use “cheap money” to finance their big (leveraged) buy-out transactions (LBOs).

Amidst the credit crunch in the USA, any substantial corporate debt will attract attention from the market and rumours will spike speculation – it is simply the nature of the market.

The private equity sector, like many other sectors, is composed of a substantial amount of firms, both big and small; not all of them rely on debt to finance their transactions. Surely, there is a considerable amount of debt-powered acquisition going on in the market but there is no bubble. A bubble would mean that some part of the sector is spinning out of control but from my point of view, most of the structures are very well engineered and not at all vulnerable to the extent that they would suddenly become unprofitable, distressed or even collapse. A change in interest rates will of course affect these large transactions and reduce profitability in certain ways but it seems unlikely that deals will fail or companies will be in the news with red numbers due to what I would describe as detail. Why not? Purely because this high risk & return industry has such substantial margins that it is not easily affected by small changes in the credit market. Also, this industry is not a short term industry, meaning that deals are engineered to be sustainable and profitable over several years and the countless analysts and strategist will not overlook the elementary details of macro economics.

In my opinion the chances of a bubble are rather slim in the private equity sector simply because it is an industry governed by calculating specialists; there is no madness of crowds to be found here…
As of late, there has been a substantial interest in mining and energy. Particularly the precious metals such as gold and silver are in high demand by the educated investors and there is a substantial interest in energy-related deals such as oil and uranium. There are too few good deals available in the market and it is particularly interesting to know that there is substantial capital available from the Middle East to devote to uranium investments. This development is driven by the evolution of the commodities market and is likely to continue in the coming years, very simply because energy will not get cheaper as we exploit the resources of the planet. Since milk is currently more expensive than crude oil and water is the oil of the future, there is great potential for business; the world is full of opportunities.

The luxury sector as well as the technology sector is somewhat the “evergreen” of the recent years and I deem that this trend will certainly continue as our society today is driven by consumption more than ever before. Emerging, fast growing economies like China and India are interested in luxury products, and the western world is always receptive for new technologies to improve the life of the consumer or make our lives ever more efficient. A recent trend that can be particularly of interest is the “green” industry. The ever growing ecological awareness, even if it appears hypocritical, opens endless possibilities for the savvy entrepreneurs of this world who have brilliant ideas to save energy or to save the planet. But remember, it is not so much the sector but rather the product itself and the people behind every deal that you should pay close attention to. Competence and quality are the key to sustained success in any given industry, be it farming or nano-technology.