The number of private equity firms has grown as the number of listed companies has shrunk. Multiples of private equity deals have grown and market multiples of listed companies have grown. Also, private equity firms have more dry powder than recent years while listed companies have leaned on share buybacks to spend their monies. What does this all mean? There is so much money floating around that no one knows how to spend it anymore. Why then, with so much money, has there been little risk taking for productivity growth and innovation. Perhaps it is because, like share buybacks, timing is often poor. When strapped with cash, last ditch efforts seem like the reasonable thing to do. When money is everywhere, why take risks?
The VIX is at 9 and Merrill Lynch posted cash levels for private clients at a decade-low. Bullish and queit. Calm before a storm, maybe?
At the moment, I’d rather preserve capital than hand it over for a share buyback at all time highs. I’m with Howard Marks as he writes today, “I think it’s better to turn cautious too soon (and thus underperform for a while) rather than too late, after the downside has begun, making it hard to trim risk, achieve exits and cut losses. “