Competition for mid-market buyout deals set to remain tough, says Eversheds
Large buy-out groups are facing further drops in investments as many leveraged takeovers of large companies are hit by the financial and economic crisis, research by the private equity adviser Almeida Capital suggests.
Mark Spinner, head of private equity at international law firm Eversheds, says the impact of the credit crisis is already being seen in the mid-market, but he believes the issues faced by the mid-market are much more acute where private equity houses try to raise debt to do new deals.
'The large buyout funds, where the model is one of financial engineering and using debt to create the equity return, are now dead,' he says. 'Investors will look more to opportunities where the return is predicated on creating operational improvements and synergies, rather than just loading the transaction with debt.'
Jones says the mid-market never really got involved in the excesses of the larger LBOs.
'Whilst there will always be exceptions, the level of gearing in the mid-market continues to be manageable from current cash flows, despite the obvious downturn in performance in many businesses, and as such, the mid-market is seen as a safer haven by limited partners,' he adds.
Jones believes competition for the best deals will continue to be tough with the larger buyout houses reducing their target deal size as the debt markets show very little sign of loosening up.
LPs in mid-market funds are also indicating caution in relation to new deal activity with many preferring their general partners to sit tight for the time being rather than over pay for assets.
Jones says funds that are less than 15-20 per cent invested might see the default rate by their LPs increase as they try to secure more liquidity and maintain their positions in other funds where their current funded commitments would be more painful to walk away from.
'There is no doubt that the mid market is suffering from the failure of the Icelandic banks and many portfolio companies are finding that committed, but undrawn facilities which were put in place at the time of the deal, are not as committed as they might hope,' says Jones. 'Any bank facility that is up for renewal this year is likely to find that there is considerable debate around both the extent of the facility and the cost, as the scarcity of leverage sees the banks returning to the more historic basis of pricing debt with higher risk facilities costing more.'