City Eye: The race is under way and we're running on the spot

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The Independent Online

Markets need analogies: they could be bears, bulls, lunatics head-butting buttons in a lift. Or it could be that investing in the market is like being handcuffed to a blind man: he knows where he's going and he'll take you with him; sadly, he doesn't know how to get there.

And then we have my preferred metaphor, which is that the market is a pensive sprinter: it spends 90 per cent of its time deciding where to go, and 10 per cent of its time getting there.

We are in the 90 per cent period now, across equities, bonds and residential property. We've had the tremor of the credit crunch and we've seen how interconnected things are: credit fuels deals, specifically buyouts and private-equity transactions. Denying credit to homeowners causes massive disruption.

The big US houses need to be able to leverage their loan books, either by syndicating them or raising synthetic liquidity by creating a derivatives market based on those books. And of course, the supply of money has a direct correlation to the value of the property against which much of it is secured.

So our sprinter is gazing at all this and wondering which way to go. One thing seems certain: credit instruments, all those lovely bits of securitisation, are going to be a lot less complex.

Tom Lamb, co-head of Barclays Private Equity, believes that in the new credit environment we will see a stronger relationship between lender and borrower, stronger covenants, and a new respect for the old-fashioned idea of due diligence.

Those of us old enough to remember the difficulties in the bond markets in the 1980s have the word "disintermediation" printed in letters of fire on what's left of our souls. In essence, that was about debt getting wrapped up and sold in securitised form by banks to other banks hungry for high yield.

It's exactly the same this time round except that the producers of the high yield, the borrowers, used to be companies issuing junk bonds. These have now been replaced by slow-witted borrowers who've been force-fed credit by sales forces working on commission (ie, if they sell loans, they get paid; if they don't, they don't).

Quite how we engineer a soft landing from this is really quite exciting. Especially given that because of the interconnectedness of markets, we all have seats in the plane (see what I mean about markets and analogies?).

Anyway, the new credit instruments are about to appear. They will be that bit simpler but that bit more suitable for modern needs – in theory, anyway.

The hiatus is having a big impact on the deal flow of small- to medium-sized buyouts, according to Friday's statistics from the Centre for Management Buy-out Research (CMBOR), which was founded by Barclays Private Equity and Deloitte at Nottingham University Business School over 20 years ago. CMBOR indicates that 2007 has been a record year for UK buyouts at a remarkable £38.5bn to the end of last month – already 45 per cent higher than the whole of 2006, which brought in £26.5bn.

"For the larger buyout market the situation looks difficult because of the significant overhang of unsyndicated debt in some of the larger deals," said Mr Lamb in a prepared statement with the statistics. "I do not expect there to be many £1bn deals announced until we are well into 2008."

But over lunch last week, all credit to him, he turned up clutching the announcement of European buyout firm Cinven's £2bn bid for two divisions of the Emap media group. How are they funding that? We both found ourselves scratching our heads – in a pensive sprinter kind of way.

martin@martinfdbaker.com

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