Purse strings are tightening across the world. It is a strange situation: money is cheap, yet just not available. It is ironic to talk about tight liquidity at such low global interest rates, yet if you talk to hedge funds or private equity players they will tell you that money is very tight. Deals are getting pulled out. The head of Baer Capital told CNBC TV18 yesterday that a $350 million commitment was pulled out last week and one rich individual investor also went back on a capital commitment. This specific example highlights a growing trend of the liquidity tap running dry.
Not all of this has ripples in the secondary market directly, which is why they do not always show up as large portfolio investment sales. Yet, make no mistake, it matters deeply to several listed stocks. Take the case of real estate: Unitech is unable to do its $1.5 billion institutional placement, despite its stock price losing 40 per cent this year. The listing of DLF’s real estate investment trust in Singapore seems stuck. Forget initial public offers, even placements to targeted investors planned earlier are coming unstuck. This poses a huge problem to companies for which fresh capital is a key ingredient for growth. A lot of the earlier earnings estimates for such companies are predicated on easy equity capital. Now not only is capital hard to come by, when it does it may come at significantly lower valuations, implying much greater equity dilution for companies. An additional hit can come for stocks that were dependent on “unlocking” stories, where either IPOs of subsidiaries were expected at lofty valuations or where placements for these subsidiaries were expected to set high valuation benchmarks and augment sum of parts value. All of this may now need to be revisited.
Hopefully this liquidity freeze will not last long. Some money could find its way into equity assets if the commodity market cools off. Commodities seem to have been recipients of most of the risk capital going around the world today. The bigger relief would be when the extreme risk aversion seen in global investors eases off but given that the size of the credit problem in the US is getting bigger with every passing day, that may have to wait awhile. Till then the equity market may have to make do with crumbs.