If history is any guide, last week's stock market correction, driven by liquidity concerns in the real estate sector, may signal (counter-intuitively, perhaps) continued strong activity in the emerging and middle market company investment arenas. Here's why:
History. Historically, real estate and venture and private equity investing cycles have run sequentially. The venture capital boom of the late 90's was paralleled by fallow residential and commercial real estate market conditions during that era. Similarly, the stock market lethargy (largely driven by massive investor fallout in technology sectors) of 2001 through 2005 was paralleled by almost bubble-like market conditions in coastal residential real estate markets.
Main Street Moves Markets. Traditionally, it is the individual "retail" investor who provides the "pop" on the upside and the "fizzle" on the downside in both markets. So the individual investors that were active in the late 1990's in emerging technology investment were and are the same folks participating in and driving the residential real estate boom of the early 2000's. Those investors are now segueing back to the operating company investment markets, providing much needed liquidity to emerging companies beneath institutional investment radar.
Active Acquisition Markets. We are living, for perhaps the first time in history, in truly international merger and acquisition investment markets. Unlike in the past, M & A activity in 2007 flows ALL WAYS (and always) between nations. Trends for 2007 are for European, Asian and U.S. M & A activity to rise more than 140%, 110%, and 27% respectively versus 2006 aggregate deal volumes (Mergerstat). These active, international M & A markets create a positive liquidity "trickle-down" effect to the emerging and middle markets.
How long will these favorable private equity market conditions last? Growthink's view is that long-term global private equity fundamentals are rock-solid and will be so long into the foreseeable future. As importantly, our view is that there is no "shock" event, such as gas price shock, a large-scale terrorist incident or an accelerated housing slump, that can derail the positive momentum for more than a few weeks or months. As the Romans would say, Fortune favors the bold now more than ever - seek out manageable risk and the rewards just possibly might be far greater than expected.