Polk peppy on prospects for 2010

PALM BEACH, Fla.—A yellow happy face flashed brightly on the screen at the beginning of Bill Polk's opening talk at Barnes Buchanan Security Alarm conference here Feb. 4. Delivering his annual overview of the financial markets and lending, Polk pointed to the happy face and said, “We're almost here.”

“It's a far cry from one year ago,” he added.

There's improving market sentiment, and as a result certain types of secondary loans are starting to make a comeback. The focus, Polk said, is on maintaining discipline in lending. There are limits on the depth of liquidity, he said: “How big can a club deal get? This is a challenge.”

M&A and LBO activity is expected to drive the market. There's cash available from banks and non-banks and there's pressure to put that cash to work.

“The deal structure is much more conservative than [five years ago],” Polk said. “But lenders are getting more aggressive.

And there's a new, and very influential, player in the market: the federal government. “Washington has become a bigger force in market than it's ever been in history,” Polk said, noting that the enormity of the bank bailouts and the stimulus package means the federal government is much more tied into business deals than before. More regulation of the financial markets is to be expected, though “we don't have a full picture of the affect of government regulation yet,” Polk said. The House passed a sweeping reform bill, but the Senate has yet to act on it.

Polk issued a warning to those who deal with state and local governments to “watch your receivables if you do business with these guys.”

State and local governments are having trouble paying bills now, he said. “They don't have the money-printing presses that federal government has.” Not every state is in trouble; Wyoming and Nebraska have budget surpluses, but it's important to pay attention to this “because state and local government are big customers of the security industry.”

The security market is “extremely complex, driven by many forces.” Increasingly, the lines are blurring between what's defense and what's security. As an example, Northrup Grumman moved its HQ to Washington, DC. “They're redefining themselves as security company,” Polk said.

Polk ended his discussion on an upbeat note. There's strong strategic and financial interest in the sector, and the security industry is perceived as a safe harbor in the storm, he said. Transaction economics are getting much more favorable and buyers are stepping back into the market.

Last year, Polk talked about how “evil persists” in the world and that acts as an engine in many ways for the security industry. He sounded a similar note when he talked about the exceptional current conditions of the security industry.

He pointed to a Foreign Policy magazine survey in which 100 “top global thinkers” were asked to predict 2010 global game changers. “Ninety-two percent of the answers have at their core a security threat. So, at high level, we have an awful lot of loft and tailwind with us.”