Private Equity Firms Backing Off From New Deals, Says Grant Thornton

by Jason Gorringe, Tax-News.com, London

25 June 2008

The vast majority of private equity firms will be doing fewer deals for less money over the coming 12 months, as the industry reveals its most pessimistic transaction outlook in at least five years, according to the latest Grant Thornton Private Equity Barometer.

In the quarterly survey of 100 private equity executives, 85% predicted that deal values would fall over the coming year, up from just 13% who foresaw deal values falling at the same time last year, and 69% in Q1 2008.

The number of deals being completed in the coming 12 months was also predicted to fall, with 64% of PE houses foreseeing a drop, compared with just 10% in Q2 2007, and 33% last quarter.

This is the most pessimistic deal sentiment expressed by the industry since the survey began in 2003, according to Grant Thornton.

David Ascott, Head of Private Equity at Grant Thornton, suggested that 'wait and see' was now the order of the day, as private equity firms held tight for better economic conditions, in order to exit with returns approaching those envisioned when investing initially.

He observed that: "The stubbornly cautious sentiment in the market reflects the fact that there have been many PE deals caught out due to the credit crunch and rapidly changing economic situation, as business values have dropped and certain sectors face an tumultuous short term outlook."

"Now that we are beginning to see a significant adjustment, private equity houses may now look to acquire at lower multiples, while still targeting risk-adjusted returns. But it is the companies that were bought just before the credit crunch started to bite that are most likely to be causing some pain. These are the deals forcing the lack of movement," Ascott continued.

However, the news was better for private equity-owned companies, as 84% of PE executives expect their own portfolio companies to grow in the coming 12 months, including 37% that foresee major growth.

Those working for private equity owned companies can also breath a sigh of relief, with just 2% of those surveyed planning to make portfolio company redundancies. In fact 59% actively planned to increase staff levels.

"Most private equity firms have the ability to take a longer term view, offering the ability to consolidate business portfolios and focus on fundamentals rather than having to push through the sale of a company in a given timeframe. It is hard to make the charge of asset strippers stick when you consider the long term position most PE houses are now taking," Ascott added.

However, the current cautious outlook is set to last for some time yet, with the majority of executives now expecting the effects of the credit crunch to continue for at least another year; 60% said the crunch would last another 12 - 24 months, while 9% expected it to last even longer.

The sector set for the most interest from private equity over the next 12 months is business services, particularly facilities management, with 55% of executives surveyed saying they would be likely invest in this area.

Second was perennial favourite healthcare, with 39% of PE executives looking at opportunities in the sector, followed by financial services, with interest from 21% of PE houses.

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