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Where Might I Find This Magical Place?

Now, I'm usually focused on multiple-of-cash returns.  After all, you can't eat IRR, or so they tell me. (Actually, I think the hedgies have us PE cats whipped when it comes to glib phrases; how can you beat: "Miller Motorcars doesn't accept relative return as a form of payment."?) 
That said, if anyone can point me to the place from which this piece of recently-spotted equipment came, I'd be much obliged!  What they're sellin', I'm buyin'!

Izzy Math

Back in the day, no one in Brooklyn had air conditioning.  Now, we could deal with that, but the real killer was that far too many people had plastic slipcovers on their furniture.  Hot apartments and vinyl seats: a deadly combo! 

After a eighteen innings of stickball out in the summer swelter, we'd all rumble-tumble over to someone's house for video games, lemonade, and, if we were lucky (or unlucky depending on whose mom was cooking,) dinner.  Always in a big hurry to sit down and start playing games, we paid little mind to the inevitable pain of getting up once our leg-sweat had bonded our skin to the infernal plastic.

And the most bittersweet place to visit was the DiPietro place.  There, the plastic slipcover found its most profligate use: the faux-rococo decor lay beneath two layers of 4-mil thick clear vinyl . . . that stuff was everywhere, even on the lampshades!  But it was all worth it: the always-elegant Mrs. D was an outstanding cook and my buddy owned the only Intellivision on a block of Ataris.  And besides, the amiable malevolence Mr. and Mrs. D directed at each other lent a sitcom air to the apartment.

I'll never forget one particularly goofy exchange.  Mrs. D had just brought a dress home from Gimbels and proudly announced to us that she'd saved 20% by buying off the clearance rack.  Mr. D practically spit his Ballantine all over the yellow shag and bellowed, "Izzy, just 'cause ya got twenny poicent off don't mean ya saved anyting.  Fer cryinoutloud, ya still spent money, maybe twenny poicent less than ya would've, but still more than you should've."  

And recently, I've been having  lot of flashbacks to those long-lost languorous afternoons at the DiPietro's.  At least four (remember, I don't blog until I get more than three data points so as to keep confidentiality) LBO-sters raising funds have said to me recently that they were seeing "great deals" again: companies that were previously selling for X times EBITDA were now selling for X minus 1 or X minus 1.5 times. 

Guys: just because something is cheaper than it was, doesn't mean it's cheap.  As my buddy, Du, says, elegantly updating Mr D, "twenty percent off is still eighty percent on."

Now I've been spared the "things are suddenly cheap" reasoning by my own managers; I like to think that all the weekend ice fishing on Lake Wobegon clears the head.  But I do worry there's a lot of rationalization out there right now.  And it all starts with the poster-child rationalization: the assertion that downturns are the best time to invest.  I'm not saying that they aren't, I'm just a bit suspicious of the data that people cite.  Inevitably, someone whips out a spiffy chart that overlays vintage year returns on GDP growth figures.  The line goes down, the bar goes up.  Beautiful.

But on further review, the number of recessions that have taken place during the mature years of the private equity "business" can be counted on about half of one hand.  Not exactly what one would call a robust data set.  It's just confirmation bias; people look for data that proves their hypothesis, no matter how meager that data.

And remember, it wasn't all that long ago that people were saying that seven was the new five, in terms of multiples one could pay for a business.  But if prices have come down two turns of EBITDA, does that mean that the old five is the new seven?  That just seems like a return to normal pricing.  And normal just isn't good enough right now.  Things have to get a whole lot cheaper.  After all, the public markets are on sale and the opportunity costs of capital are extremely high.  Moreover, people are assigning an incredible amount of utility to liquidity.  Drawing capital today for a new investment means that deal has to be an absolute screamer.

And if folks focus on screaming deals, not just places to dump some dollars, we'll hopefully be able to say in retrospect that this turned out to be another recession during which it was a good time to invest.  I just hope that when we say that, it will be because people invested in great companies at good prices, not because we're seeking confirming data and confusing correlation with causation.