The number of private equity houses is expected to fall significantly over the next 24 months, according to a survey carried out by Smith & Williamson, the accountancy and financial
The number of private equity houses is expected to fall significantly over the next 24 months, according to a survey carried out by Smith & Williamson, the accountancy and financial services firm.
Two thirds of the 136 senior private equity executives across 75 mid-market firms polled shared the gloomy prediction for the industry.
Brian Livingston, head of private equity at Smith & Williamson, says: ‘Recent poor performance has meant many private equity houses are being squeezed: they cannot raise new equity funds and cannot raise bank finance either, since the banks are increasingly focusing on investors’ track records before committing finance for deals. As a result, many firms are effectively unable to make investments and may have little choice but to merge or shut down.’
Whilst respondents overwhelmingly stated that entry multiples on new investments have fallen since 2007, so far lower prices have not resulted in more deals. Eighty two per cent agreed that over the last two years it has become much harder for companies to raise finance from private equity investors.
Livingston says: ‘Even with lower entry multiples, the lack of bank funding makes it difficult to structure deals in a way which will generate satisfactory returns. Instead, we are seeing more and more private equity houses shifting their focus from making new investments to preserving the value of their existing portfolios."
The survey also found that 93 per cent believe that more private equity-backed businesses will breach banking covenants in the year ahead.
The private equity community does not expect to get much help from the government either, with only 12 per cent believing government policies will help to ease problems in the private equity industry.
However, despite the current difficulties most private equity professionals expect conditions to improve towards the end of 2010: 68 per cent think investor confidence will begin to return; 50 per cent believe bank finance will become more readily available; and 57 per cent expect the current recession in the UK to end.
According to Livingston now is a time of real opportunity: ‘The debt-fuelled frenzy is over, and financial engineering can no longer be relied on to generate equity returns. Private equity will have to go back to fundamentals – concentrating on old fashioned, solid businesses with strong management in attractive sectors. With returns based on business, rather than banking, we see a further move to more realistic pricing.
‘Some have claimed that the private equity market is dead. The love affair with debt may be over but private equity will survive and adapt – this is the age of equity investment.’
