M&A activity in the European private equity industry fell in 2008, but respondents to a PricewaterhouseCoopers survey believe there will be greater private equity involvement in the
M&A activity in the European private equity industry fell in 2008, but respondents to a PricewaterhouseCoopers survey believe there will be greater private equity involvement in the financial services sector during 2009.
Steve Cater, partner at PwC, says private equity firms were behind several mid-market deals in early 2008, but suffered a significant decline in activity in the latter part of the year as banks progressively tightened their leveraged lending criteria.
However, 66 per cent of respondents to the PwC survey of financial services M&A professionals expect the dramatic fall in share prices of banks and financial services companies will lead to greater involvement of sovereign wealth funds and private equity as investors in the financial services sector during 2009.
At the same time, a number of major financial institutions are considering implementing disposal programmes. The purpose of this is to help them to rebuild their depleted capital bases and to re-focus them on core activities. Key will be establishing whether the market can sustain a price reflecting the value of the business to be disposed.
Cater says the private equity community is sitting on considerable investment capital but may need to invest with less leverage than in the past. But with asset prices at a low, the lower entry prices should, at least in part, compensate for the reduced gearing to help maintain returns. Vendor finance may be required to bridge any gap.
PwC also says that service businesses within major financial institutions will attract private equity bidders. These businesses tend to have more defensive qualities, stronger cash flow conversion, lower dependence on key individuals and operate within a less onerous regulatory framework than core financial services.
