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As far as the classic Kiwi OE goes, Paul Chrystall's stint in London was a bit more taxing than pulling pints in a pub.
As a 20-something backpacker, his day job was helping to dig a Canadian bank out of a terrible hole it had got into in Britain by signing up screeds of sub-prime home loans.
Now 40-something and, like almost everyone, dealing on a daily basis with the fallout from the latest sub-prime crisis, Chrystall is experiencing a ghastly sense of deja vu.
"It was exactly the same product - exactly the same mortgages, insurance, securitisations. The whole damn thing was the same as everything we've gone through now. I can remember sitting there with my general manager at the time and it had just about taken us five years to clean up the mess, and at that time it was the largest residential mortgage loss in UK history.
"We were musing how they got into it and whether others would do it again, and our conclusion at the time was that you'd do it again if you hadn't been through it before."
Not that Chrystall is feeling even slightly smug. These days, as head of Maui Capital, he is one of the most respected players in New Zealand's private-equity scene and is all too aware of the global repercussions of the credit crunch.
It was inevitable that the spotlight would eventually fall on private equity.
This month, in a wonderfully colourful piece in Vanity Fair titled "The Ultimate Bubble?", financial journalist Michael Woolf ponders how long it might be before the domino effect catches up with legendary private-equity firms Kohlberg Kravis Roberts (KKR) and Blackstone.
The Boston Consulting Group, which last year produced a report insisting that private equity was virtually bulletproof, recently came out with a new report predicting up to 40 per cent of the largest private-equity firms could fall over within two or three years.
And just a couple of weeks ago, unions in Britain and the United States issued a similarly panicky statement, warning that the precarious state of private equity was a "looming disaster".
Our unions have also been fretting for some time over the enormous growth of private equity. In October 2006, in his regular economic bulletin, Council of Trade Unions economist Peter Conway blamed private-equity owners' short-term focus as one of the factors suppressing growth in wage rates and destroying jobs.
"In the last week, numerous Australian companies have come under huge pressure from private-equity funds and hedge funds which seek to buy up listed companies, leverage up debt, restructure the company and then sell the firm within five years after extracting huge profits," he wrote.
Now, 2 years on, Conway acknowledges not all private-equity firms are to be feared.
"There are some examples where private equity have come in and it's been a welcome change, and it's been new investment. We're not saying this is all completely bad, but there are some issues."
In its widest sense, of course, the vast majority of New Zealand businesses are privately owned. According to the Deloitte/Management magazine's list of our largest 200 companies, private companies make up seven of our top 10, 69 per cent of our top 100, and 80 per cent of our top 200.
New Zealand has something like 1500 private companies with a turnover of more than $25 million.
Nevertheless, it is only in the past few years that banks have been willing to lend private-equity firms enormous sums at very cheap rates to buy companies previously well out of their reach.
New Zealand firms snapped up in the spending spree have included household names such as Tegel, Griffins, Whitcoulls, Fresh Up, V, Hoyts, Kathmandu, Healtheries, Noel Leeming, Bond & Bond, and Yellow Pages.
While a Canadian pension fund was stymied in its bid for a large chunk of Auckland Airport, and Australian firm Pacific Equity Partners was effectively prevented from delisting The Warehouse, some other very large businesses have also recently been bought by private-equity firms, including Veda Advantage (formerly Baycorp) and Michael Erceg's alcopop business, Independent Liquor.
Private-equity players also own a big chunk of one of New Zealand's largest vehicle leasing businesses (FleetPartners) and many of our retirement villages and nursing homes.
Canterbury University academic Bill Rosenberg, well known for his frostiness towards foreign ownership of New Zealand companies, says he has been worried for a while about investment banks' waning enthusiasm for the aged-care sector.
"If any of them should go bust, it just multiplies the insecurity of those who are at the stage of life where they don't have any choices," says Rosenberg. "It also preoccupies management with ownership issues rather than the care of people there."
The law of the investment jungle is that those who take the most risks get to reap the highest rewards. At the extremely risky end of the market such as angel investing and venture capital, where sometimes people are betting on not much more than a clever idea, it is not unknown for investors to get back thousands of dollars for each dollar they put in. That said, most expect to lose a fair bit along the way.
Private equity likes to invest in bigger, more stable businesses. It is accepted there will still be the odd disaster, but investors have traditionally made more money than they would in shares or property - generally 20 per cent or more a year.
It's not all about greed, of course. Without such funds, immature companies might never get the chance to grow, as banks and sharemarket investors would consider them too much of a risk.
But somewhere along the line, banks got less risk-averse. As economies boomed all around the world, private-equity funds - run by smart people with seemingly impressive track records - no longer seemed so scary. Why not allow them to buy even bigger - and theoretically even better - businesses?
For investors, it was a no-brainer. Not only was loading up the businesses with debt tax-effective, but the banks only wanted back a small slice of the profits in interest. Provided the business was fattened up and sold off fairly quickly, the investor - who had contributed only a relatively small amount of their own money - was in for a potentially magnificent return.
The problem with this strategy, as any sharemarket investor who has dabbled in margin lending will tell you, is that if the economy or the particular industry you have invested in turns to custard, it's the investor who gets hit hardest.
In most cases the bank will get its money back, even if it has to convert some of its debt to equity or break up the business and sell off the bits.
The private-equity firm might lose what is known as the "carry" - the 20 per cent slice of the profits it gets if it hits certain targets - but will have collected its 2 per cent management fee.
But in order to keep a business afloat, the investor may have to throw good money after bad, or take a substantial loss.
As unions, central bankers and politicians around the world have pointed out, the prices some private-equity firms have been paying for businesses in recent years, spurred on by the banks, have had all the hallmarks of irrational exuberance, substantially increasing that risk.
And it's not just multi-millionaires who contribute to private-equity funds. Billions of dollars of retirement savings are tied up with private-equity firms.
The New Zealand Superannuation Fund is no exception. Its latest report shows that at the end of November, its private-equity investments were worth just over $165 million, or 1.4 per cent of the fund's total. Other institutions, such as ACC, AMP, and private pension schemes have also invested in private-equity funds.
In actual fact, the private-equity bubble has already burst.
No leveraged mega-deals have been done in New Zealand for at least 18 months. And according to some investment bankers, the high-water mark from the tide of private equity that has swept international markets lies on New Zealand shores - the 2007 sale of Telecom's Yellow Pages Group.
The only explanation, it seems, for why Hong Kong-based private-equity company CCMP Asia and the Ontario Teachers Pension Plan were prepared to pay $2.2 billion for Yellow Pages is the rather childish: "Well, everyone else was doing it".
Yellow pages businesses have always been seen as cash cows, and are thus ideal for private equity. As telecoms companies worldwide found themselves rewriting their business plans, many directory businesses came up for sale and private-equity firms couldn't snap them up fast enough.
Several of the world's biggest private-equity players - including buyout kings KKR - turned up at Telecom's doorstep in 2006 with many dozens of roses.
Interestingly, the board took a while to warm to the idea of flogging off such a major asset.
At the time Telecom was playing a complex game with the Labour-led Government over the possibility of further regulation of the sector. Although management was keen on selling the business, some directors were concerned about waving goodbye to such a reliable source of cash.
But once the tender process started their doubts evaporated. The very first bid was way above what the board had decided would be the best price they could expect.
In fact, the eventual pricetag was more than 14 times the business' enterprise value divided by its earnings before interest, tax, depreciation and amortisation - a multiple that astonished some of the other bidders, let alone those who hadn't been involved in the process.
One of the founders of Trade Me, Rowan Simpson, wondered aloud on the Valuecruncher website whether Yellow Pages was really worth more than three Trade Mes. And the owner of the website, Wellington investment banker Mark Clare, also chimed in, describing the pricetag - including nearly $1.5 billion for the intangible asset known as "goodwill" - as "fantasy".
Clare's own detailed analysis showed the business was worth about half what the winners paid, although he acknowledged that the dirt cheap debt private-equity firms were able to access (in this case making up three-quarters of the money handed over) made it more attractive to them than other bidders.
In a posting now three years old, he noted: "Is this cheap debt a sustainable on-going condition? Too hard to call - but if a big private-equity transaction goes bad and some big lenders lose significant capital, things may change."
Clare also noted that the success of the deal would largely depend on CCMP being able to offload its stake before too long at an even better price.
It has to be said, that is now looking extremely unlikely. These days even some of the biggest yellow pages groups are selling at only two or three times prospective earnings, according to the Financial Times.
Last November the Wall Street Journal went so far as to question whether the industry may be facing extinction, given that it is being hit by the double whammy of a global recession and advertising moving to the web.
With both print and online ad spending in the sector forecast to fall at twice the rate of decline of broadcast television this year alone, many yellow pages businesses will struggle to survive, the WSJ predicted.
In New Zealand, Yellow Pages' new owners failed to interest the public in a bond issue. According to news reports across the Tasman, as long ago as May last year the company's subordinated debt was on the market for as little as 60 cents in the dollar.
Accounts recently filed with Companies Office show the business, since renamed Yellow, made a $61.2 million loss in its first full year under private ownership, with debt servicing costs swallowing a huge chunk of its revenue.
The company is still on the acquisition trail, forking out an unknown amount for one of its main rivals, APN News & Media's Finda online business directories. It has also announced a partnership with Google - a move it had previously resisted.
Insiders insist its bankers are comfortable with how things are going so far. However, it is understandable, given the price paid for the business, that rivals question how long that might last.
When private equity bought the business it retained chief executive Dudley Enoka. Just before Christmas, Enoka announced he and board member Bruce Cotterill were swapping jobs.
Cotterill has worked with private equity before. He admits many funds have benefited greatly from the boom times of the past few years and are obviously unlikely to maintain such high returns.
"There's no question that private-equity investments are now all carrying lumps of debt that without the private-equity invasion they might not of, but having said that, the businesses will be well managed and well governed under the private-equity structure."
Asked whether we could see the sort of disasters here that have already occurred in Australia, such as the collapse of Australia's biggest discount retailer, ADR, Cotterill replies: "I don't know. I don't think so because by nature the private-equity players are there with funds to inject if necessary."
Indeed, but that can also be a humiliating process, as it has been for private-equity firm CVC, which has been forced to inject an extra A$325 million ($405.8 million) into struggling Australian media company PBL, which among other things owns ACP Magazines and the Nine television network. It is also public knowledge that Ironbridge has had to put more money into Riviera Boats, Australia's largest maker and retailer of luxury motor yachts.
But if more equity doesn't fix the problem, the options are limited. In the current economic conditions, getting rid of a business by floating it on the sharemarket or selling it to someone else in the trade could be a little tricky.
In 2007, Australian private-equity firm Gresham confirmed it was in talks to sell the Noel Leeming and Bond & Bond retail chains in New Zealand that it had bought three years earlier. No deal has yet been done.
Private-equity firms have also been forced to inject more money into several New Zealand businesses to keep the banks at bay, although none is willing to confirm that publicly.
But banks don't appear to be panicking just yet. Many of the racier deals were done by offshore banks, not local ones, they note.
One of the most enthusiastic players here has been Bank of Scotland International, owned by HBOS Australia, which was recently taken over by the Lloyds banking group. Buyouts it is believed to have been involved in include Qualcare, Tegel, MediaWorks, Ezibuy, Aperio, and Eldercare. Commentators have questioned whether Lloyds will want to remain in the private-equity business.
One prominent banker, who would speak only on condition of anonymity, says most local banks are more worried about their corporate-type loans.
"Anything done in later 2007 or early 2008, the value of those businesses mean they paid quite high multiples. Are they under water completely? Probably not, but some of them will be pretty close."
Naturally, the businesses insist they're doing okay in the circumstances. But for media businesses in particular, those circumstances are pretty ugly. Like Yellow, most have been hit by a migration of readers, listeners and viewers to the web, and falling advertising revenues.
The woes of New Zealand's two big publicly listed media companies, APN News & Media (publisher of the Herald) and Fairfax, are already well known. No one really knows how well MediaWorks - owner of TV3, C4, and one of our two big radio networks - is doing, now that it's owned by private equity. But rumours are rife that it is also struggling.
Kerry McIntosh is the local representative for Ironbridge, which bought MediaWorks from CanWest in late 2007 in a deal that valued the broadcaster at more than $700 million. Ironbridge also owns a stake in fertility clinic Repromed, vehicle leasing business FleetPartners, waste management company EnviroWaste, a string of backpacker lodges, and is believed to be eyeing the New Zealand operations of childcare provider ABC Learning Centres.
McIntosh admits the current advertising market is tough, especially for TV, but says he is confident the management team will be able to work through it.
Most MediaWorks staff appear to be happy with the change of owner, noting that Canadian-based CanWest had its own problems before it quit New Zealand. They also note that there have not yet been redundancies as there have been at rival networks.
Asked if that could yet happen, McIntosh notes the business was already pretty lean when Ironbridge bought it, "so we don't see any real change to the operation of that business going forward".
He agrees, however, that the whole Australasian media industry is poised for a major shake-up. There is already speculation Sky might be keen to acquire TV3, for example - a move that would hardly be welcomed by TVNZ.
"I think it will look quite different in a couple of years' time both in terms of the configuration of assets and the ownership of those assets," is all McIntosh will say.
Mark Averill, who oversees private equity for PricewaterhouseCoopers, notes that it's not unheard of for private-equity firms to cough up more money to help their investments.
"The reality is, there must be - and are - some private-equity investments that are breaching covenants. The issue is, [which] bank, and what is the fund doing about it."
Averill believes we will soon see multinationals eyeing New Zealand, despite the credit crunch, as the kiwi dollar continues to drop.
"What we've observed is trade buyers are a lot more competitive from a value perspective, so that pendulum has changed as the quantum of leverage has decreased, and that is a very noticeable trend in the current market. The choice is for a multinational corporate to do a US$1 billion dollar acquisition in the US or a US$30 million investment in New Zealand. [The NZ deal] is a far easier deal for them to approve."
Locally, too, private-equity firms appear to be waiting for prices to hit bottom before they start investing again. All say that at the smaller end of the market, where deals are generally less than $100 million, their investments are doing just fine - mostly because they are not highly leveraged. Some have no bank debt at all.
Direct Capital, which together with ABN Amro is trying to raise $250 million for a second Pohutukawa fund, says it is delighted with the response so far.
Direct Capital founder Ross George, who has been around the scene longer than most, is particularly keen that local firms are not tarred with the same brush as some of their big international rivals.
"There are two types of private equity," George insists. "One was the model that most of the Aussie funds ran, and that was buying quite reasonably sized businesses - buying control of them and putting a whole lot of leverage in - and that business has finished."
For business owners, the big adjustment now is the fact that valuations have dropped considerably.
"Pricing is back to normal now," says George. He doesn't want to sound insensitive, but notes that 2009 could even be a vintage year for his firm. "You've still got to execute well, obviously, but there's still an opportunity to do really well."
Paul Chrystall agrees. Last year Maui had no problem raising $250 million, none of which it has yet spent.
"I don't want to sound like a vulture with dracula teeth, but the reality for us is this is potentially a fantastic time for investing," he says.
And at least one big Aussie fund still thinks so, too. Pacific Equity Partners is now a major player in the local economy, having bought a string of high-profile businesses here over the past few years.
Managing director Tim Sims insists the firm is delighted with all its investments so far and is continuing to hunt for more deals. On the strength of its record PEP raised another $4 billion last year. So far it has spent only 20 per cent of it.
Like other private-equity firms - and patient Asian investors - PEP can smell some bargains, particularly as foreign banks lose their appetite for funding debt outside their home markets. That is likely to lead to some good businesses being put up for sale just so their owners can raise some cash, he says.
Sims believes some private-equity firms will fall by the wayside, but unions and others who warn of a "looming disaster" are overstating the case, he believes.
Unlike many other sorts of deals, all private-equity deals have built-in emergency plans, he notes. If the worst comes to the worst, the bank will simply sell the assets, possibly even to another private-equity firm.
It's not as if we haven't been here before.
It was almost exactly 20 years ago that the then-mother of all leveraged buyouts, the takeover of tobacco and food giant RJR Nabisco, spawned one of the world's best-read business books. That Barbarians at the Gate has just been reissued with a new afterword is an irony that has not been lost on its authors.
And New Zealand has an even more recent example. Just ask anyone who used to work for the once-mighty Levene retail chain, which collapsed in 1998 after Murray Bolton's $520 million leveraged buyout of Brierley's Skellerup Group went horribly wrong. Or for that matter, members of the public who helped finance the deal through the issue of junk bonds. At least two books were written about that saga.
We all know the old aphorism from American philosopher George Santayana, about being doomed to repeat history if we cannot learn from it. But it was another George - Irish writer George Bernard Shaw - who made the more acute observation: What history teaches us is that we never learn.
Paul Chrystall acknowledges that many people, both here and overseas, have once again learned some harsh lessons in the past few months. He is personally convinced the finance sector will never be quite the same again.
New Zealand is incredibly lucky, he says, that we joined the private-equity party rather late and didn't get nearly as sloshed as some other countries. But it may take a while, he believes, to convince business owners that the booze has definitely run out.
"Part of the problem is it takes an enormous amount of time for people in existing situations to accept that the world has actually changed for good. I'm absolutely certain it has."
Chrystall reckons we won't see the boom times return for a very long time. But just how long?
"It will be another generation of people who reinvent the wheel," he muses. "But they'll end up doing the same thing in 15 years' time."
