SAN FRANCISCO – For the second consecutive year, JPMorgan hosted a panel on private equity investment in the healthcare sector, this year’s panel event menacingly entitled “After the storm, What Happens Next?”

Panel moderator John Coyle, managing director at JPMorgan pointed out that the credit market has taken a big hit over the past year, and he queried the assembled group to give a “best guess” concerning when the market might rebound and, when/if it does, what kind of new characteristics it will have.

Stephen Murray, managing partner of CCMP Capital, said that there still is credit available out there, though generally priced at more conservative terms, and that it has adjusted to fit the terms of the current market situation.

While he said he thinks that the credit market will rebound to levels from 2003 and 2004 suring the current calendar year, he added, “I do think it’s going to take quite a while to sort through the various liability sides of the vehicles that are out there that have helped drive what’s now referred to as the credit boom.”

He said that because credit will be more difficult to obtain, it could mean that the “quality of the investments being driven will have to be higher.”

John Connaughton, managing director at Bain Capital, said that there is $300 billion worth of debt sitting out in the market that has to be sorted out and that this will cause “a lot of volatility for the next six months. But after that, the market is going to be priced back — as Steve said — to a normalized level. Once that happens I think we’ll see liquidity come back into the market.”

Coyle said that he believed the earliest a recovery in the credit market will be seen will be the second half of 2008.

But Paul Queally, a general partner at Welsh Carson Anderson & Stowe, argued that the market is still recovering from the bust, so a market recovery “may take far longer than people want to fess up to.

“I think of this as a dog door in a garage with lots of dogs needing to get through that door. If they go through there in an orderly fashion, we’re not going to have any problems, but the dogs are all getting hungry, and they start pushing though the door and they get stuck. That’s exactly where we are today.”

Queally said he believes that the credit market crunch may actually have been a good thing for private equity and should help improve the quality of the deals that are made in the future. “I think the vast majority of the deals done in the last 18 months will have very disappointing returns.”

He said that because of this there will be “much more volatility in the public market.” And — continuing his canine metaphor much to the audience’s delight – he said, “I think you’ll see dogs really trade at dog-like levels.”

Connaughton said that from his perspective the market conditions in the first half of 2007, before the credit bubble burst were horrible, and his group went 0-for-20 in deals that it tried to close at that time.

“And while I think it’s tough now, we are seeing these companies coming in at much more reasonable values,” Connaughton said.

Tim Sullivan, partner at Madison Dearborn, said his firm was active in the first half of 2007 and found the going much better.

“[W]e were able to get to high quality companies that we otherwise wouldn’t be able to get to,” Sullivan said. “They either would have gone public if they were private. And they were public companies that we couldn’t have gotten to go private and do some of the transformational things that were discussed earlier.” The debt markets assisted his firm, Sullivan said, in getting “to what we would define as the high end of the box we were in, the box being the range of multiples that we were buying and trading in. All the transactions that we did in general were at very reasonable interest rates, [and] there weren’t any covenants associated with it and not much in the way of amoritization.”

Now, he added, the debt that is available today “is more expensive, it has covenants, it has amoritization so the companies have to grow, if nothing else because you’re going to run into covenant violations in 18 months to two years down the road and you’ve got to factor those scenarios into the equation.”

Queally said that when prices do “right-size themselves, we’ll go out and purchase very large companies and we think our opportunity is coming up over the next two years.”

He and his partners sold 14 companies over the last 18 months because they believed that the market was “robust,” but have held off on really doing any buying over the last year. “We think we’re going to get an opportunity to buy some very high quality companies,” Queally said.

Murray said the healthcare market has proven to be particularly attractive to the private equity market for several reasons: “One, I think private equity generally drives itself when done correctly on asymmetrical information.”

Having to traverse the waters such as those of the regulatory and reimbursement variety in healthcare can make an investor team, he said, “that over time, has demonstrated better insights into how those trends will sort themselves out than others. And those are the basis of having knowledge and experience. For that reason, Murray said that people who have invested over a long period of time in the healthcare sector “have tended to do very well because of the insight we need to have.”

And he noted that it’s a very tough area to invest in “episodically.”

Connaughton said he actually welcomes the looming specter of universal healthcare coverage that most people think will appear in some form if the Democrats win the White House in November.

“We like the industry to turn upside down because that will create great buying opportunities for us where we can buy really great companies.”

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