• Big Deals will feel the pain. The major Wall Street firms are going through contortions right now trying to unwind very complex porfolios and quantify their exposure to the sub-prime market. CLO's and CDO's had become very popular vehicles- yet their complexity belies the fact that banks have not fully quantified their exposure yet. As such, large banks will continue to seek to conserve capital (or shore up through seeking outside investments themselves). Until this phase passes, expect the market to be much tighter for mega-deals.


• "Micro" Deals will also be hurt. What do we mean by "micro-deal?" Simply the kind where a small, private buyer will likely look to leverage a house as collateral to buy a company. To the extent that real estate is involved in such a manner, expect that these deals will be tougher to do. (There is an relief valve here: the SBA 7a Program)


• The Middle Market remains the sweet spot. At the end of the day, banks still need to lend money in order to profit. Middle market deals that make sense - from both a valuation standpoint and a collateralization standpoint - are going to get done. Yes, we can expect deals to get vetted, but good deals will still happen.

Takeaways

The current climate is fraught with uncertainties. But as we stated above, banks still need to loan money. And business transactions are going to happen no matter what- especially in the middle market where many closely held firms face succession issues, seek to diversify risk, or where strategic combinations make sense. The pace of deals will not be at the torrid rate of early 2007, but they will happen nonetheless.