Gentle buyout boom predicted by private equity barometer

22 January 2010

According to Grant Thornton's latest Private Equity Barometer 26% of private equity firms failed to make any investments in 2009. But the report found that the outlook is set to improve in relative terms although a significant recovery will have to wait until 2012. More than half of the responses indicated that difficulty in raising debt financing to support new investments will be one of the main obstacles to closing deals this year compared to 81% who named unrealistic vendor pricing. More than 65% cited difficulty in sourcing quality business for investment as one of the main obstacles.

Jonathan Steed, of Grant Thornton's Leeds-based corporate finance team, said that the results indicated a debt market thaw.
"We have recently worked on a transaction funded by debt amounting to more than four times EBITDA, a debt multiple we have not seen in the previous 18 months. "At the same time, the target was a great business with great assets and good visibility of long term earnings."

The report also revealed that 80% of respondents still needed to invest 25% or more of their latest fund while 27% needed to invest more than three quarters.
Mr Steed said that private equity sponsors were very keen to complete new deals as they needed to invest the majority of their existing funds before they could raise additional money. "We expect to see more companies coming to market in the coming months because the market is stabilising, because key stakeholders like banks want them sold and because vendors are worried that there might be an increase in capital gains tax," he added. "We have also seen an uptick in private company sale mandates since September as some vendors just don't believe that valuations are going to increase dramatically over the next two to three years."

As for investment trends the majority of respondents (81%) said they intended to invest in buyouts over the next 12 months.
Some of these also intend to invest in development capital by taking minority stakes with 58% of respondents confirming their intention to do so.
Nearly 30% indicated that they would invest in distressed assets while 12% want to invest in publicly listed companies.

Private equity firms are also feeling less pessimistic reflected in the large drop of respondents expecting to see portfolio companies breaching loan covenants.
In the fourth quarter 66% of private equity respondents conceded that they expected some of their portfolio companies to breach loan covenants, while 34% claimed that none of their portfolio companies would do so.
In quarter three 81% respondents feared their portfolio companies would breach banking covenants. "Our private equity clients are definitely feeling less pessimistic than they were three months earlier," said Mr Steed.