Venture Round: Now where's that panic button?

Private equity investors, reeling from a weekend of news that ranged from bad to really bad to really, really bad, met for a group hug this week at the Private Equity Analyst’s annual conference in New York. But there wasn’t a lot of love to go around.

The typical bravado of the private equity world seemed to be in short supply at the conference. IN VIVO Blog was particularly shaken as we wound through the revolving door on the Park Ave side of the Waldorf Astoria. A young, private equity professional—the kind of person who typically reeks of overconfidence—declared simply to his cohorts. “I’m terrified.”

Thus the tone was set.

To be fair, we did hear a bit of “this is good for the industry” talk, and there’s some truth to that. Richard Caputo, managing principal of The Jordan Company, a PE shop, says many of the debt structures that fueled the rise in private equity are as shaky as any of the sub-prime mortgages that are sinking the US economy. Private equity investors will have to go back to doing smaller deals requiring little or no debt, which will require honest and thorough due diligence to assure the acquired companies are worth the dough. “The world has changed and we’re going to have to work harder,” Caputo says. “There is going to be a lot of carnage before it gets better,” adding that in six months we’ll be looking at the “good old days of Sept. 2008.”

But here’s the good news. Health care is a safe haven again.

Terrence Mullen, managing director of Arsenal Capital, says health care companies still are a strong bet. He didn’t elaborate much during the session, but after the meeting, Mullen said the fundamentals of the business aren’t going away. People will get sick. They’ll need to get better, and companies will get paid to provide the products and care. These facts are irrefutable. They’re also word-for-word what we were hearing when the technology industries collapsed eight years ago, forcing venture investors and private equity folks to rediscover health care.

Arsenal Capital isn’t one of those come lately types. But don’t be surprised if interest in health care deals get a little frothy, particularly in those companies (or divisions within larger companies as you can read here) that generate solid revenues.

Given the interest private equity firms have shown in pharma, it will be interesting to hear the feedback at our Pharmaceutical Strategic Alliances conference next week in New York.

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Attendees at the last session on Tuesday had the opportunity to vote on several questions regarding the state of the industry. The polling showed that 79% of the attendees don’t think the credit crunch will break for private equity investors until later next year; 50% say the IPO window won’t open until 2010; and 62% say that venture firms will need to change their investment models in order to find faster routes to liquidity.