Private equity – back in the hunt for profit
The sector is finally recovering from the financial crisis, with IPOs such as Foxtons set to pave the way for new acquisitions
Saturday 21 September 2013
It seemed as if the private-equity bubble would never burst. Household names such as Boots, Birds Eye and Weetabix had already been snapped up by buyout firms and in late 2007 it was the turn of Guy Hands’s Terra Firma to consume EMI, the record label behind The Beatles, in a highly leveraged £4.2bn deal.
Within weeks, however, the world turned upside down as the severity of the US sub-prime mortgage crisis became clear. The private-equity industry would end up being one of its casualties and sympathy was in short supply for a sector of firms dubbed “amoral asset strippers”.
Several years on from the credit crunch, it remains unclear whether private equity will ever regain the swagger it showed in the years leading to the financial crisis. The cheap bank debt which fuelled its unprecedented boom between 2003-2007 is not as easily available as it once was and most firms have been forced to scale back to recover from such a huge shock.
One hope may be a recovery in the IPO (initial public offering) markets, which some believe could kick-start another round of major acquisitions.
In the UK, this has been demonstrated with the stock-market listings of companies like Esure and Partnership Assurance, which have made tidy profits for their private-equity backers, including Tosca Penta and Electra.
BC Partners is listing its once-troublesome estate agent Foxtons – unofficial trading started yesterday – only adding fuel to the fire while Terra Firma floated German property manager Deutsche Annington.
“Sentiment reached an inflection point towards the end of June thanks to the recent flotations on the London Stock Exchange,” says Sachin Date, head of private equity at accountancy Ernst & Young (EY). “The resurgence of activity is encouraging for the exit market. As long as the IPO markets remain open, we expect to see more PE-backed companies make it to a public listing this year.”
Despite these positive signs, just 13 private-equity backed firms have listed on the UK’s main market since 2008, according to EY.
The industry’s record at taking companies public is also chequered, and experts point to the listing of Debenhams in 2006 as a prime example of this. CVC, TPG and Merrill Lynch Private Equity pocketed £950m, yet the retailer’s shares still trade well below the 195p listing price. It is fair to say that investors remain cautious.
Even if the IPO markets continue to grow, private-equity firms will still have to rely on traditional forms of funding. Figures from data provider Preqin show that fundraising by European private-equity firms has waned since the credit crunch. Back in 2008, 423 funds raised €113.2bn (£71.2bn) although since then the figure has fallen to €63.6bn from 220 funds last year and €57.2bn from 114 funds so far this year.
Steve Brown, the head of private Equity at RSM Tenon, said: “The fundraising environment is showing some signs of improvement but is not fully recovered. There is stiff competition from the sheer volume of PE fund managers in the marketplace, and increasing competition from other asset classes for those same funds now that global economies seem to be turning the corner.
“Managers are more than ever being judged on their recent successes, both in investing funds well and demonstrating good exit multiples on realisations. Reputation and brand seem to count for less nowadays.”
What seems clear is that the private-equity industry remains far from its halcyon days and most experts agree its future remains in the balance.
Investors say they will back firms with the right track record – a trend seen by CVC’s recent fundraising, which is said to have attracted pledges from investors totalling €14bn this year. Others, including Permira, are said to have struggled showing the precarious nature of the industry as Graeme Gunn, a partner at Standard Life Capital Partners, sums up.
“We expect the industry volume and value to slowly regain ground over the coming years. However, it will continue to be volatile quarter on quarter.
“There is a much better balance of supply and demand, but it is hard to see us regaining the market highs of 2007 anytime soon… but that’s no bad thing. We would rather the managers focused on doing great deals over big trophy deals.”
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