Conference sobered by economic projection
Jacksonville Business Journal
A sobering afternoon forecast
David Darst, Morgan Stanley’s chief investment strategist of its Global Wealth Management Group, shared this forecast as the afternoon keynote speaker at the ACB conference:
There is a 70 percent change that the American economy will experience a 19th Century-style recession, where access to credit is cut off, Darst said. There is a 10 percent change that the country experiences a Japanese-style recession, which would be 12-14 years of a flat economy, he said.
There is a less than 10 percent chance that the economy would be as troubled as the one marking the Great Depression because regulators have already helped by cutting interest rates and taxes. The chances of the economy entering such as dismal period are lessened by automatic economic stabilizers, such as unemployment insurance. There is also a 10 percent chance that dismal predictions were wrong and the economy and stock market will improve "smartly" by mid-2009.
"This market is driven purely by psychology and sentiment," he said.
Making deals in a weak economy
Loan demand has slowed and unsecuritized financing is gone, but there are still ways for companies to receive financing in the weak market, said a group of financial experts Thurday at the Association for Corporate Growth, a two-day meeting in Ponte Vedra of private equity firms.
Right now there are two primary source of financing for capital: senior bank debt and private equity, said Stephen Goldman, senior vice president of commercial lending at Bank of America in Jacksonville, who spoke to about 600 people that were expected to attend the event.
Goldman, who said he could not speak for all lenders at his bank, said many lenders are simply looking for a strong balance sheet and credit-worthy companies.
On Wednesday, many conference attendees participated in tours of Jaxport, Cecil Field and Cecil Commerce Center. On the second day, conference goers gathered for speakers and presentations at the Marriott Sawgrass Golf Resort outside of Jacksonville.
From a private equity standpoint, acquisitions have slowed this year and a lot of consumer businesses and retailers have been impacted, said Patrick Boroian, partner at Brockway Moran Partners based in Boca Raton, another of the speakers in attendance on Thursday.
“In the last 30 days we’ve seen more businesses that have to get financing” and the lenders who are not as healthy are not renewing these business’ lines of credit for the next quarter, he said. However, “we’re seeing better quality companies than what we’ve seen in last four or five years.”
In terms of what equities will look like in 2009, Carl Roston, a partner at Akerman Senterfitt, said “we can’t look into the future” but there will be great opportunities to buy companies, though not at the multiples levels and pricing in previous years.
“Diversification is important,” especially when business slows in one sector, he said.
Goldman said the finance deals are getting back to the basics where lenders are looking at their leverage of funding for three years or less, which means the companies will have to seek more funding from private equity groups.
Lenders will also look at the relationship between the private equity groups and the businesses they’re investing in to make sure they are standing by their clients through the downturn.
“From a commercial banking perspective, it’s critical for the companies and private equity firms to really get to know your bankers,” Goldman said. “If they know you and [the historical relationship] they are more comfortable to do business with you.”
As part of a panel, Randolph Smith, a Grant Thornton LLP partner, said drayage and intermodal is playing a bigger role in the trucking industry, which has been spurred by high fuels costs, driver shortage and growth of international trade. Revenues through intermodal operations increased in last quarter by 23 percent to $513.2 million, he said.
The industry’s total revenues are expected to shrink by 4.2 percent in 2008. Plus, reduction in manufacturing production and declining retail spending are causing a reduction in the industry’s revenues and margins.
Jonathan Skelly, PCE Investment Bankers distribution team leader, said logistics and operations technology is increasingly used by the more savvy providers. To get the most out of purchased software you need to understand its potential and have employees understand it, not just a hired consultant.
John Anderson, Fenway Partners Resources Inc.’s managing director, said private equity firms play a variety of roles in warehousing, including being an owner, merging a third-party logistics operations into the warehouse, have its companies using the warehouse and could be warehouse avoider by using more efficient transfer of goods from ships to trucks or rail.
Fenway Partners’ criteria for involving itself with warehouses are:
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