IT IS NO surprise that private equity houses should be among the list of bidders for WestLB’s project finance unit: they are awash with cash and desperate for deals.<\/p>\n
Somerfield to Safeway, Anglian Water to JJB Sports, Mitchells & Butler to McCarthy & Stone: virtually any company where there is even a flicker of a bid rumour is likely to have attracted interest from Permira, Candover, Kohlberg Kravis Roberts, BC Partners or one of the other big firms.<\/p>\n
So far, few deals have been consummated, most commonly because the target businesses have demanded more money than private equity companies are prepared to pay. The industry is hoping, however, that eventually real transactions will follow the welter of talks.<\/p>\n
‘Everyone is a lot busier now than they were three months ago,’ said Jonathan Russell at 3i. ‘I think it will be a busy second half of the year. But whether the deals will be easier to consummate than they have been, I do not know. We will have to wait and see.’<\/p>\n
There is certainly no shortage of cash for deals. Billions of dollars were raised by the industry globally in the wake of the bubble years at the turn of the century: the bust that followed means that much of that cash has yet to be spent.<\/p>\n
The European Venture Capital Association reckons that the industry is still sitting on euros 50 billion (pounds 35bn) of equity investment, raised from insurance companies and pension funds. Add in the debt,which can make up as much as two-thirds of the financing of a deal, and the total available to spend is probably closer to euros 150bn – enough to fund at least the next five years’ investment, and possibly even double that.<\/p>\n
‘Everyone talks about the overhang of money,’ said Mark Pacitti, private equity partner at Deloitte & Touche.<\/p>\n
‘But we are in a quiet period for mergers and acquisitions. The pipeline is picking up. Possibly it won’t bounce back, but there will still be a gradual increase in economic activity. Private equity houses are in a good position to take advantage.’<\/p>\n
In many deals, all the bidders who end up on the shortlist are private equity houses. Bertelsmann’s disposal of its scientific publishing business was a recent example, although Tom Lamb, head of Barclays Capital’s UK private equity business, said he had recently lost a few deals to trade buyers.<\/p>\n
Stuart Watson, head of Ernst & Young’s venture capital arm, says the increase in activity is partly ‘contrarian thinking’. The stock market is not receptive to flotations and most companies are more concerned with shedding parts of their own businesses than with buying more.<\/p>\n
‘So, private equity businesses think this is a good time to buy,’ said Watson. ‘As long as you have deep pockets and are prepared to hold businesses for three, five or even seven years, there are some pretty good propositions around.’<\/p>\n
That kind of investment requires rather different skills from those that were in demand three years ago. Then, the key requirement was to be a good dealmaker as most acquisitions were sold on again, at a handsome profit, in 18 months or less. Now, buyers need to be confident that they can make the business grow, or at least cut its costs significantly, in the years they will have to keep them.<\/p>\n
‘I am not sure all private equity companies can do that,’ said 3i’s Russell.<\/p>\n
Some observers say there are already signs of some firms paying too much: one pointed to the buyout of National Car Parks by Cinven as an expensive recent deal.<\/p>\n
The fact that private equity firms are often the only buyers around poses a tricky problem for them: how do they realise their investments? Deals will always be done with a view to making an exit, usually within a maximum of five years, at a profit. Firms need a track record of doing that to be able to attract new investment from pension and insurance companies and those who have already put up their funds will not wait forever.<\/p>\n
Unfortunately, however, poor stock markets and cash-strapped trade buyers mean that both the traditional exit routes are all but closed. The British Venture Capital Association found that divestments by British private equity firms last year fell by 3 per cent to pounds 2.6m compared with an already poor 2001 – and that included pounds 628m in written off investments. Few expect exits to get any easier this year.<\/p>\n
In theory, that should not be a problem as the companies can simply invest some of the billions they raised three years ago. Unfortunately, however, those funds are not always where they are most needed and, while some firms are awash with money, others are strapped for cash. So raising money is not easy.<\/p>\n
‘Investing partners are nervous,’ said Ernst & Young’s Watson.<\/p>\n
Indeed, some have started asking for their money back – so far, mainly among venture capital firms where, says Watson, ‘a number have apparently voluntarily given money back to their limited partners’.<\/p>\n
In continental Europe, this has led to a game of pass the parcel as private equity firms have sold to their rivals, sometimes more than once. This could become more common as firms struggle to find alternative exits to demonstrate a good record.<\/p>\n
Watson hopes this will also lead to consolidation. ‘The industry could do with it,’ said the Ernst and Young chief. ‘We had a proliferation of venture capital funds in Europe – all sorts of people were getting involved and many of them shouldn’t have been. Most of the individuals have been flushed out, but their funds are still there.’<\/p>\n","protected":false},"excerpt":{"rendered":"
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