Now is the Exact Wrong Moment to Press Pause on DealsAug 2, 2022
All over the markets, I am hearing – and seeing – purchasers, investors, lenders, and other parties worried about doing deals in ‘this uncertain market.’ Some are putting a pause on their activities. I have some thoughts about that as follows:
First, all markets are uncertain. One may think they are calm and certain, but they are not. Only six months ago, everyone thought everything was fine, and then ninety days later, it was anything but fine. So looking at this market as more uncertain or worrisome than any other market, I would suggest, is probably incorrect. Anecdotally, I would guess that the more certain the markets seem, the less certain they really are.
Second, I wrote an article a few years ago about the folly of trying to time the market. My point was that you just couldn’t do it, so why try? If you find what I am saying here at least a little bit persuasive, you will find the article of great interest.
Third – I throw out the proposition that if you are putting a pause on your investing, buying, lending, or other activities, you are essentially trying to time the market. You are making an educated bet on macro events. Will there be a recession? If so, a shallow one, a long one, or a deep one? Will interest rates rocket up? Will they go down? Or will they stay where they are? And many more macro things. But if you really think about it, your chances of being right on macro predictions over a long period of time are remote. What you essentially would be doing is timing the market.
Notably, for the past ten years, everyone – I mean everyone – said interest rates would definitely go up next year—but they didn’t. Then this year, when inflation took off, everyone expected them to go up a lot. And now, maybe not that much since people think inflation might get licked soon after all. But then next month it might look different again. I mean, it does seem fair to say that interest rates do what they do, and we cannot predict them.
Fourth – right now, for the first time in about five years, those with capital (debt or equity or other) hold the cards over those parties clamoring for that capital. Six months ago, it was the other way around – where there was just too much money all around, and capital providers had to compete to land the deal. For these reasons, this might be just the time to be putting out capital. You have eager counterparties – better terms – and sometimes safer valuations (if pricing and other metrics are lower). Indeed, for the first time in a while, those with capital can pretty much get most of the things they previously sought but could not get from counterparties six months ago.
Now to be clear, I by no means am advocating throwing caution to the winds for debt and equity capital providers. Of course, you should be conservative in your risk/reward analysis. But you should always be that way. My thesis here is that it is no different now.
Right now, a fair number of parties have pressed the pause button. So for those seeking to outperform, this is a chance to do exactly that. If you wait until everyone un-pauses, you are settling for middle-of-the-pack performance. As an aside, there is nothing wrong with middle-of-the-pack performance – see my previous article on that subject.
But for parties seeking to outperform and those with capital to invest, spend or lend, I suggest that the smart move now is to do exactly what you have always done – neither more nor less. Namely, assess each deal – assess that deal’s need for capital – then make whatever decision you think makes the most sense -- and try your best to be (my favorite phrase) overpaid for risk.
Bruce Stachenfeld, aka The Real Estate Philosopher™