Key factor that keeps takeovers scene hot

The number of takeovers in the market now is as high as at any time this year, and most advisers say there are a lot more in the pipeline that they hope will be ready to come through in the New Year.

This is counter-intuitive. It is widely accepted that the financial crisis has undermined private equity's ability to do deals because it has choked off the flood of debt they have been using to finance their acquisitions. For the past few years, those houses have accounted for a major part of deal activity - certainly at the highly visible larger company end - witness Alliance Boots and the tilt at Sainsbury's.

But, for the moment at least, those days are gone. Indeed, they seem in some cases not even to be interested in bidding for the private assets that companies are seeking to sell. So the natural assumption, with private equity confined to the sidelines, is that the overall number of deals would fall away.

This has not happened for one very good reason. There appears to be a pent-up demand in companies for strategic acquisitions, and this is coming to the surface. The reason it has been suppressed until now is the other side of the private-equity phenomenon. For the past couple of years, companies have held back from launching takeover bids because they feared that doing so would simply draw attention to the attractiveness of their target. Private equity would then do its own sums, enter the fray as a rival bidder and in all probability use its greater financial firepower to outbid the trade buyer and make off with the prize.

What we see now is an urgency among companies to make up for lost time. Hence the mood in the advisory community, which is distinctly upbeat. They think next year will be very busy.

SOMEWHERE in a cupboard, I still have a cup won in 1973 at a speed Monopoly competition organised as a bit of fun by a company called Property Growth Assurance.

The company and many others like it ran property funds, which allowed individuals to buy or sell units that rose or fell according to the value of an underlying portfolio of properties. Though for legal reasons these units were sold as insurance policies, they were virtually identical to the property unit trusts of today.

Unfortunately the cup, battered and tarnished though it now is, survived a lot better and longer than the property managers and their funds. They and their investors discovered, as the 1970s fringe bank crisis undermined the property market, that they could not sell buildings fast enough to meet the demands of customers wanting their money back, and one after another they went out of business. The lesson learned then was that unitised property funds work in rising markets, when more money is coming in than going out but are ill-suited to falling markets, where redemptions exceed the inflows and the illiquidity of the underlying assets becomes a serious problem.

Now the same old challenge confronts a new generation of funds. Property prices are falling. New Star, for example, announced on Monday that the value of its main property unit trust was being cut by a chunky 17.8%, which is considerably more than the 12.5% fall seen recently at Schroders or the cuts at other managers.

Property valuation is, however, as much an art as a science when prices are not being regularly tested against sales in the market. So while these cuts may reflect what would happen in the marketplace, there is also a bit of gamesmanship involved. If the cut in values is big enough, it may persuade investors that the worst has already happened and it is too late to run for the exit - which may stem the outflow. At the same time, potential investors might look at the lower prices and think the units represent a good play on recovery, and buy some to lock away.

Obviously, the valuations have to be rooted in reality, but equally the psychology is important because if enough new money flows in, the managers can use their cash to pay off the sellers without being forced into a fire sale of the underlying properties. It is a tough balancing act for the managers, but it would be good if they can get it right in a way their fathers failed to do a generation ago. Most of the time, a property unit trust is a good product for retail investors - but only if it survives the periodic downturns.