KEY POINTS:
The so-called credit crunch could mark a turning point in the private equity boom that has underpinned equity markets, including New Zealand's, for the past few years.
Goldman Sachs JBWere head of private equity Paul Chrystal said widening credit spreads on debt markets were making it more expensive for private equity firms to raise cash for their highly leveraged acquisitions.
"Critically, according to press reports, there is at least a US$11 billion hangover of leveraged buyout debt in the US that American investment banks had intended to place, or had underwritten on behalf of large buyout firms that they can't place."
That had already affected private equity with leading US firm Kohlberg Kravis Roberts being forced to rethink its buyout of UK's Alliance Boots Group.
Chrystal said credit markets would similarly tighten in Australia, and the effects would be seen in New Zealand.
"If I'm doing a buyout and I know that my debt is going to be more expensive and I might get less of it per purchase then that should start to impact on how much I can afford to pay for a business, so the price of businesses should, in principle, start to edge downwards."
Rickey Ward, of fund manager NZ Guardian Trust, said takeover activity or the prospect of it was "the main driver to a certain extent" of the local market's gains for at least the past year.
Sharply increased cost of funding such deals wouldn't remove its influence completely, "but it makes it a hell of a lot harder".
"It means they may be a lot more picky on what investments they focus on rather than what appeared to be to a certain extent, a bit of a blanket approach."
While the fallout from the US turmoil has already buffeted the local sharemarket, New Zealand Exchange head of markets Geoff Brown believed it was a "swings and roundabouts" situation for the NZX.
The credit crunch marked "a turning point" for private equity with less favourable conditions probably resulting in a much needed influx of fresh blood for NZX over the medium term. The private equity boom's effect on the market had been two-pronged.
It took companies, including some leading ones, off the NZX, but private equity also grabbed firms such as Metropolitan Glass and Hirepool that might have otherwise gone public.
Cheap money and the willingness of banks to lend a large proportion of the purchase price meant private equity could offer a substantial premium to what companies' owners could expect from floating the stock.
That had now changed.
"There had been some words of caution spoken previously about this, but the chickens have now come home to roost and very quickly.
"What's occurred probably gives us a better chance of bringing companies to market than otherwise," said Brown.
Furthermore, tighter credit conditions could force private equity firms to offload their acquisitions faster than anticipated, and in many cases that would be back on to the public market.
"It might not be too long before we see some of those businesses back."
