Private equity buyout and exit transactions fell 61 per cent and 87 per cent year-on-year in volume and value terms in the first half of 2009, confirming that the buyout frenzy of yeste
Private equity buyout and exit transactions fell 61 per cent and 87 per cent year-on-year in volume and value terms in the first half of 2009, confirming that the buyout frenzy of yesteryear is a bygone era, according to a report by mergermarket.
However, the report says the industry is far from being in a state of permanent decline and although the market remains challenging, a nascent revival in private equity’s fortunes appears to be underway.
This is borne out by the fact that both buyout and exit transaction volumes and valuations posted quarter-on-quarter increases in Q2. The quarterly gains were relatively marginal, with buyouts up by a single transaction to 125 deals carrying a collective value of EUR4.6bn – a 56 per cent rise from Q1. The volume of exits rose by 14 per cent and valuations more than doubled to EUR2.8bn over the same period.
However, market conditions for M&A remain challenging and consequently the art of deal-craft is more important today than ever, the report says.
Private equity players are responding by creating innovative solutions to counter these barriers. Financial investors are structuring transactions in ever more complex ways. For instance, there has been a greater use of deferred earnout clauses and vendor financing to bridge the liquidity gap, which also helps to somewhat reduce misaligned valuations. There has also been an increase in the volume of minority stake acquisitions and debt-to-equity ratios have unsurprisingly fallen, as leverage remains difficult and expensive to obtain.
On the fundraising side of the industry, there are rising concerns that some distressed LPs may not be able to meet their commitments and that other investors may be more reluctant to invest in comparatively illiquid assets while cash flow remains of paramount importance.
There has been a flurry of trading in the private equity secondary market, a phenomena underpinned by a number of factors. First, there are the LPs in need of quick cash who often sell off commitments at steep discounts. Second, there is the so-called ‘denominator effect’ where institutional investors, with defined asset allocation criteria, sell commitments in response to falling values for other assets to bring portfolios back into line. Meanwhile, buyout houses still need to raise fresh funds, although many LPs are either more reluctant to invest, or will demand more accountability from private equity houses.
Most commentators agree that LPs may use their newfound strength to negotiate lower fees with GPs, though the changing relationship could manifest in other ways. For instance, Nordwind Capital’s plans for a buyout of Global Fertility, a start-up aiming to consolidate the in-vitro fertilisation industry, was opposed by a group of investors on the grounds that it were not in line with the fund’s investment strategy of targeting turnaround opportunities in the Germanics region.
In the meantime, while buyout opportunities are fewer, private equity firms are focussing on preserving value in their companies. An increase in public equities, suggests that buyout houses will have recovered some value in their portfolios in the period since March.
On the sell side, initial public offerings are returning as a viable exit route, although it is still too early to predict the full-scale recovery of the IPO market. Indeed, company valuations are still down compared to year-earlier levels and there are many undervalued firms out there that can be acquired on the cheap.
Maintaining its position as the most active space for private equity deal making in Europe, industrials and chemicals transactions accounted for the largest proportion of buyouts (28 per cent) and exits (30 per cent) across all European sectors over the first half of 2009. In the period, a total of 70 acquisitions worth a combined EUR968m came to market, down from 94 deals worth EUR11.7bn during the same period in 2008. The challenging market conditions continued to stymie exit opportunities as well, with volume and value activity falling by 66 per cent and 92 per cent year-on-year to 32 transactions valued at EUR842m.
In line with longer term trends, the UK & Ireland remained the main hub of private equity activity over the first six months of the year with 51 buyouts worth EUR1.3bn and 23 exits valued at EUR1.2bn coming to market. As a share of total European buyouts, the region accounted for around 20 per cent of activity in terms of deal volume while the value share was 17 per cent – figures which are down from long term averages of 28 per cent and 38 per cent respectively. However, exit activity in the UK & Ireland was relatively robust, accounting for 20 per cent of total disposals in the European market and nearly 30 per cent of overall exit valuations.
