The Beginning Of Interesting Times
Stephen Phillips

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The UK's Chancellor of the Exchequer recently stated that we face the most challenging economic conditions for 60 years. Quite why 1948 is the starting point for the comparison is another debate, but we are writing the day after America's fourth largest investment bank, Lehman Brothers, filed for Chapter 11 (and the day the US government bailed out AIG). It is no longer tenable to view the current conditions as just a temporary blip. While we can all have opinions about how severe the coming downturn will be, what is not in dispute is that the era of easily available credit is over for the time being. When economists review the period prior to the credit crunch – or to use a better name – liquidity crunch, they will depict an era of easy liquidity, which spurred the growth of complex deal making in the various financial capitals of the world. Much ink has already been spilt on the problems relating to subprime mortgages and acronyms such as SIVs, CDOs, and CLOs have now passed into the public's vernacular.

This article is not, however, about such financial alchemy (an appropriate metaphor, by the way, since recent events have proved again that you cannot turn base metal into gold). It will focus on activities in the ‘real economy', which are beginning to be affected by the liquidity crunch. Vast swathes of industrial and service activity were taken over by private equity firms in leveraged buyouts in recent years and the number of private equity houses expanded from 231 in 2002 to 735 last year.