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November 24, 2008

Theatre of the Absurd

Recently I spoke to a young, upwardly mobile, American private equity associate out of Chicago at the latest ACG Conference in Toronto.  I asked, as I did many, how low EBITDA multiples had dropped in the U.S., and this particular investment professional said something absurd...  "Actually, we recently lost out on a deal because we valued the company too low at a 16x multiple, the final valuation was 20x apparently".  

Where had this guy come from, El Dorado?  The more common language trudging through the marble halls of private equity firms is far more vehement at its core as the tide of credit slips through their hands. Many in the portfolio management industry are using words like "capitulation" to describe the current market apoplexy.  Private equity fund managers are not exactly having that much fun, but they are now being forced to reinforce their dykes against the fallout flood of melting consumer confidence, recessionary hyperbole, and teetering financial institutional giants.

The G20 meeting held by the world's undisputed champion of empty pledges, George W. Bush, was held in Washington on November 14, and looked like a charming get-together for the President and 20 of his closest friends, its effectiveness is yet to be seen, but certainly the opportunity to establish a sense of global solidarity was lost amidst the vagueness of the summit's conclusions. And today, before a podium and in front of a dilapidated-looking Henry Paulson, George Bush announced yet another emergency and absolutely necessary bailout package for another of the United States' beleaguered financial institutions, though Congress dismissed the auto industry the week prior.  

It seems things have reached a point of absurdity, the now mighty Democrats (though so did a few Republicans) triumphantly lambasted the auto industry executives about the dysfunctional nature of their business models last week, but petitioned the very same industry not a month earlier by calling for protectionist measures (also laying the ground work for higher operating costs and material costs) when they were fighting for their own jobs.

In 1961, Martin Esslen coined the term Theatre of the Absurd to describe a type of tragicomedy, in which rationality is usually corrupted to disenchant the audience and cultivate a sense of unreality...nowadays it seems life does imitate art.  Though a 20x multiple is absurd to most in the private equity industry, these days, absurdity may actually lend itself to credibility.  

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