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LBOs: Wait and see

Far from looking to exploit opportunities in the hung LBO pipeline, some say that patience should be the watchword in this market.

Funds go hungry as distressed trough fails to fill

"There is a very big danger associated with chasing things too hard," says Ian Cash, managing director at Alchemy Special Opportunities Fund. "Some people have money burning a hole in their pocket and are chasing marginal opportunities – and those marginal opportunities are marginal for a reason." Another investor agrees. "You can’t push too hard on the market. If it is not yielding up opportunities then you have to back off. But we are now at a tipping point and we will start to see companies entering distress."

Considering the amounts of money that have been and are being raised with this in mind, it will take a great deal of discipline to wait it out until the market runs its course. Default risk over the next 12 to 18 months remains minimal. In a recent JPMorgan conference call, Peter Acciavatti, head of US high-yield credit strategy, pointed out that with the present default rate standing at slightly below 1%, he sees defaults rising to just over 2% by the end of 2008 and to 4% by 2009. The recent crop of highly leveraged LBOs (legacy deals) therefore have a bit of breathing space before they are due to refinance.

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