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Private equity buy-outs reach five year low

Private equity has hit a five year low with the value of buy-out deals in Europe reaching their lowest point since 2004, according to a report published by mid-market buy-out firm Bridg

Private equity has hit a five year low with the value of buy-out deals in Europe reaching their lowest point since 2004, according to a report published by mid-market buy-out firm Bridgepoint.

The value of buy-out deals in Europe was EUR73bn last year – 60 per cent lower than the peak of EUR184.9bn in 2007.

Mark Spinner, head of private equity at international law firm Eversheds, says the drop in deal values and deal volumes is caused by three main factors: lack of liquidity in the debt markets; lack of confidence in the economy; and the fact that vendor price expectations still do not adequately reflect the current economic environment.

‘Added to this there are a number of limited partners who started to invest in private equity as an asset class when debt was easy to come by and private equity returns were outstripping the market even in the very short term,’ he says.

‘While private equity remains an attractive asset class, historically it has out performed almost all of the other indices and asset classes, in short term there will be a lot of pain to bear as a number of the deals that were done in 2006, 2007 and early 2008 are unwound under a mountain of debt.’

Spinner says this uncertainty has meant that many new entrants to the private equity arena want out and would be keen not to see any further capital calls against their commitments until matters settle down.

He also says that many are rumoured to already be talking openly of defaulting. The longer term investors are also urging caution preferring to retain as much liquidity as they can to shore up existing portfolio companies rather than make new investments in less geared opportunities.

‘2009 will not, in my view, be a complete disaster although activity levels are likely to stay depressed for most if not all of the year,’ says Spinner. ‘Activity will be in slightly different type of deals as good businesses fail as a result of too much debt and others look to re-equitise their balance sheets in order to keep their banking syndicates at bay. Deals such as the re-equitisation and rights issue at Premier Foods in return for the relaxation of banking covenants will be much more common than before.’

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