Are the good times over for the buy-out industry?
The long-term future of the private equity sector is in doubt as firms struggle to raise funds, reports Jamie Dunkley
Sunday 20 January 2013
Bankers weren't always public enemy number one. There was a time (not so long ago) when a different type of capitalist was the target for placard- waving demonstrators up and down the country.
Britain's private-equity industry was at the height of its powers between 2003 and 2007 when debt-laden buyouts of household names such as Boots, sparked fears of savage job cuts, low wages and employment conditions akin to Victorian workhouses.
The industry's reputation was not enhanced by the huge salaries and bonuses paid to the likes of Permira's Damon Buffini and Terra Firma's Guy Hands.
On hearing that Blackstone, KKR and CVC were considering bidding for Sainsbury's in 2007, TUC General Secretary Brendan Barber pulled no punches: "Sometimes private-equity firms turn failing businesses around, providing decent returns to their investors, pensions funds included," he said. "Sometimes, however, they give the impression of being little more than amoral asset-strippers after a quick buck."
Now, 10 years on from the start of the private-equity boom, buyout firms remain an active part of the economy with £40bn of UK pension-scheme funds invested in them.
Private equity currently backs around 3,800 companies across the country, according to industry body BVCA, employing 1.2 million people on a full-time basis. Recent figures from Ernst & Young also prove they are still looking for acquisitions, with the value of buyouts rising by almost a quarter to £15.7bn last year, including Vista Partner's £1.2bn takeover of technology group Misys.
Despite this, some experts believe the industry is facing a long-term decline. Most of the merger and acquisition activity is at the lower end of the market, under £500m at best, and many of the industry's best-known firms are struggling to raise new funds to buy the growing number of companies on the market.
Permira, which is in the process of raising a new €6.5bn (£5.4bn) investment fund is a prime example. The group has reportedly extended its deadline for investors to commit to the fund. But industry sources expect Permira will have to settle for a smaller warchest.
Other firms such as AAC Capital Partners, Motion Equity Partners and Duke Street are rumoured to have, or actually, suffered problems hitting their fund targets, leading to gossip that Europe might have seen the end of the debt-heavy, mega-deal worth £1bn or more.
The financial crisis has seen so many major private equity-owned companies struggle to repay their loans, such as EMI under the ownership of Hands' Terra Firma, that investors are looking to take their money elsewhere.
Gordon Milne, a partner at law firm Allen & Overy, says: "The funding environment for private-equity firms has become increasingly difficult over the past few years. Some investors in the funds that were raised in 2006-07 [before the financial crisis] have been unwilling to commit to new funds because private equity has been unable to generate the returns they made in previous years."
Experts say investors have become more risk averse since the financial crisis and are taking more care over how they allocate their funds. As one private-equity adviser argues, pension funds are no longer willing to put up with poor performance and will reduce the number of buyout groups they deal with.
"In the old days of the bull market, any firm could pitch up to investors and raise money – even start ups," he says. "Now investors are focusing more on track records."
Graeme Gunn at Standard Life Capital Partners says the fundamental problem is that investors are now looking for safe havens with stable returns.
"The fact is that private equity is one of the asset classes that can deliver real outperformance for their portfolio so it has a place. The issue is that many of the pension funds are at their allocation limits."
Industry figures point to recent fundraisings by firms such as BC Partners, which picked-up €6.5bn (£5.4bn) in Europe's biggest tap up of the market since the start of the financial crisis, as evidence that there is still appetite around.
"The well-established private-equity firms which have made reasonable returns in recent years in comparison to their peers, and significant returns in previous funds, will continue to attract investors," Allen & Overy's Milne claims, before conceding that record-breaking fundraisings will no longer be the norm.
"In the short to medium term, the size of the funds that are raised will be significantly smaller than in 2006-07. Similarly, we are unlikely to see the return of mega buyouts, partly due to the lack of significant amounts of debt financing on attractive terms."
Yet, with banks looking to offload non-core assets and struggling high-street retailers needing fresh money, the opportunities are endless for private-equity firms. The insurance industry has also proved an attractive hunting ground, with Apollo Management and CVC Capital Partners buying Brit Insurance for £880m and Aviva selling the motor services company RAC to Carlyle for £1bn.
Marissa Thomas, the head of private equity at PricewaterhouseCoopers, even argues that conditions in the market are as strong as they have been for some time, though it remains "very challenging".
She adds: "However, the appetite to invest in Europe is definitely there and our expectation is that once the macro-economic picture is less volatile and the excess capital starts to drain from the system, activity levels will rise."
This return to form may be driven by emerging market capital, Ms Thomas adds, with investors in areas like Asia looking to Europe. "The level of sovereign wealth interest has also risen, not so much in terms of quantum of commitments but the number of sovereign funds that are looking to invest in private equity."
Whether or not the private-equity industry returns to its halcyon days remains is debatable. However, the fact that easy funding is no longer available is not.
One executive at a London-based adviser said this could mean that some of the best-known funds will be "effectively in run-off" over the next few years, unable to find funding or do deals. Instead, they will just be winding down their current portfolios by offloading the companies on their books.
For others, these exits will mean a less crowded market, with more opportunities than ever before.
Antoine Dréan, the chairman and founder of Triago, a global private-equity fund adviser, says: "The game is certainly not up for Europe's private-equity industry. Private-equity funds, vetted and chosen with care are the best way for investors to achieve high returns with minimal risk. In fact, some of today's most promising funds are investing right in the lion's den of the Europe's sovereign debt crisis, in markets like Spain and Italy.
"We nonetheless expect a weeding out of European firms, with the best private-equity managers raising money easily and mediocre or poor managers missing targets – and even failing."
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