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LBO Sponsors Mine the Basic Industries to Stress Quality.

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M&A: The deals market is very tough now, but what kinds of companies and markets are you interested in? Are these going to be the preserve of the private equity firms as opposed to the strategic buyers once activity starts to get stronger?

Rehnert: It is hard to predict where the economy is going. I don't think that anyone has a clear perspective on what is going to happen until the current international situation, with the risk of war and terrorism, reaches some perceived point of stability. A prevailing uncertainty still lingers.

The deals we are looking at now are relatively recession-proof companies not dependent on rapid growth in unproven markets. Typically, these are companies that we can add value to through the strategic, operating, and financial capabilities of our team. Often, companies we evaluate have been under-managed or face a variety of untapped opportunities.

Schaye: A common theme is that a lot of firms are going to back to basics. There were some missteps in the recent past because people stepped away from their core competencies. Now some firms are going back to their core competencies and what I call "dot-rust" companies - those with assets that are stabilized despite the recession - and are managing those assets and driving them forward.

There will be opportunity because a lot of overseas companies are looking to divest and downsize. We have seen that with the sale of Burger King by Diageo. In the U.S. market, there is a drive for liquidity in such areas as telecommunications. We will be seeing more corporations selling non-core businesses.

Morgan: I agree about the back-to-basics theme, but we never really strayed from boring companies and mundane industries, so we are doing what we have always done.

Generally, smaller and middle-market companies are less attractive to larger strategic buyers, so that creates a natural role for private equity. Businesses that we like have high market share but are usually historically lower growth, and, in a lot of instances, that is a negative for a larger public company.

For us, stable cash flow and a very positive ability to ramp up the resources are paramount. We might be able to provide better access to capital or more focused and aggressive strategic planning to grow these businesses more than they have grown historically, or more than they might grow with a strategic buyer.

Jennings: We are a sort of a hybrid firm because we do venture investments as well as buyouts, generally with an element of technology in them. On the buyout side, the investment has a mild element of technology. Sometimes on the venture side we will go a little deeper into the technology area.

I have been in the business 17 years, and this is one of the most attractive environments that I have ever seen. You have strategic buyers, particularly in our sector, whose currencies have declined dramatically, and a lot of those folks really loaded up on acquisitions in the last few years. There is always a lag effect between a market like this and when decisions are made to actually get rid of businesses because they finally start to understand that they don't have endless access to capital to fund different businesses.

We have a tight credit environment as well. My attitude is that I would rather buy a house when mortgage rates are at 18% because fewer people are competing with me and I'd rather sell when mortgage rates are as low as they are now.

I think that a really a tough credit environment benefits people that have been in the business for a long time. We've all got our relationships so we can do things quickly. In the past three or four years, a lot of new people who came in were able to get funding because the lending community had a little less focus on the sponsor. More recently, it has shifted back to a huge focus on who the sponsor is and what they are able to do when things turn negative.

We are about as active as we have ever been. We bought the disaster recovery business out of General Electric's IT Services Group - a division that had tough numbers because it was in the technology services area. They had 13 business units and they decided that they needed to have only seven. The key is - and I think everybody here does the same thing - that we try to leverage certainty into a lower price. So we have built a record basically on closing on the terms that we said we would close on.

Tsusaka: We stuck to our mandate and even during the crazy years we focused on communications, health care, financial services, and outsourcing. We continue to focus on these areas because of our inherent strength and competitive advantages that comes from our familiarity with the sectors and our operating partner relationships with proven executives.

We probably are having the best and busiest year that we have had in a...

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