Bearish Forecast For M&A Business and Hiring

The drying up of liquidity for leveraged buyouts spells layoffs throughout Wall Street, private equity, and even management consulting, warns one prominent columnist.

"Wide swaths of Wall Street, and many of the industries that serve it, are in for some serious collateral damage," writes the New York Times' Andrew Ross Sorkin. "Forget about cutting the size of bonuses: let's start really thinking about the possibility of slashing jobs."

Sorkin is the Times' chief M&A reporter and editor of the paper's DealBook blog.

Private equity deal-making collapsed in August. Just $4.2 billion of PE-related deals were announced in the U.S. last month, a 68 percent drop from the same month last year, according to Thomson Financial. PE firms figured in only seven percent of overall U.S. deal volume for August, compared with 47 percent as recently as May. August was the slowest month for PE activity since January 2004.

"That activity is not likely to resume with any significance soon. And when it does, it will be at a fraction of its recent peak," DealBook predicts.

To be sure, other types of M&A, such as strategic acquisitions by companies, continue. And there are those who believe that risky lending will bounce back, which would help revive the private equity bid. One hopeful sign: About $6.5 billion of corporate collateralized loan obligations (CLOs) were issued last month, nearly doubling July's depressed figure of $3.3 billion.

Absent an active PE community, Wall Street would look very different. Sorkin notes that in recent years, all the big banks staffed up the "financial sponsors groups" that cater to private equity firms. Now, he says PE moguls like KKR's Henry Kravis "won't have much business going on, so the bankers won't, either. Even if you redeployed a large number of (staff) to other activities, many jobs would have to go."

The PE firms themselves may reduce headcounts or stop hiring, Sorkin says. That, in turn, would alter "the ecosystem of irrational compensation packages across Wall Street." The column also warns of collateral damage to MBA hiring and to consultants like McKinsey & Co. that added staff to conduct due diligence work outsourced to them by PE firms.