Industry survey predicts major shake-out for private equity firms
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, commented:
“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.”
Other key findings:
Whilst respondents overwhelmingly stated that entry multiples on new investments have fallen since 2007, so far lower prices have not resulted in more deals:
- 82% agreed that over the last two years it has become much harder for companies to raise finance from private equity investors.
Livingston added: “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." They may have their work cut out:
- 93 per cent believe that more PE-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:
- Only 12 per cent believe Government policies will help to ease problems in the private equity industry.
A brighter horizon
Undoubtedly private equity is a tough place to be these days. 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
- 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.
Livingston concluded: “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.”
Details of the survey
The survey of 136 private equity senior executives was conducted between 10 June and 3 July 2009. 75 different mid-market (£5m-£50m) PE houses responded, between them representing more than two-thirds of all UK mid-market PE transactions.
For further information:
Brian Livingston, Head of Private Equity, Smith & Williamson
Direct Line: 020 7131 4914
Mobile: 07764 822398
E-mail: brian.livingston@smith.williamson.co.uk
PR enquiries:
Matthew Rowe, tel: 020 7131 4550
Kate Harrison, tel: 020 7131 4228
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Note to editors
Smith & Williamson is an independent professional and financial services group employing 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Birmingham, Bristol, Glasgow, Guildford, Maidstone, Salisbury, Southampton, and Worcester.
Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.
Smith & Williamson Corporate Finance Limited
Authorised and regulated by the Financial Services Authority. A member of the London Stock Exchange. A member of M&A International.
