Afternoon:
10°c
These are interesting times for private equity. According to Close Brothers, one quarter of all the distressed companies in Western Europe are in the UK. Just 14% are in Germany, 12% are in Italy and 8% in France.
We have such a high proportion, again according to Close Bothers, because for the last decade Britain was the leveraged buyout capital of Europe. The highest amounts of leverage in the good times have set the economy up for the highest number of distressed companies in the bad times.
For this reason, most of the activity within private-equity groups today is in supporting the businesses in which they are already invested, restructuring and injecting new capital where it is needed to help them get through these difficult times, or where necessary pulling the plug on them.
Indeed, some recent research suggests that insolvency, administration and receivership have this year become the most common means by which funds have exited their investments, but the reality is that far many more are being supported than abandoned.
There is a looming problem, however, in knowing what to do with some investments where the companies need more capital but there is none available because the funds are reaching the end of their lives. In happier times, an initial public offering might have been the solution, but it is a moot point in current conditions as to whether the appetite is there.
There have been almost no company flotations on Aim or the main market for months, and there have been relatively few trade sales either as firms concentrate on what they need to do to ensure their own survival, rather than indulging a hunger to expand by acquisition.
That may change in the coming months for those companies with cash, though obviously not for the greater number which have a debt burden or problems with cash flow. Another positive sign, though a remote one from the US, is that stock markets there are warming to new issues.
There have been several tech stocks coming to market over there in recent months, and they have been well-received. So maybe come the autumn there will be some willingness to test the temperature over here too. Someone has to be first.
Nor is the position universally bleak in terms of new deals. While the big public company buyouts of three years ago are just a fading memory, there are still deals being done at the lower end where transaction values are up to £100 million and it is possible to find just one bank willing to put up the debt, rather than having to put together a syndicate.
There are even occasional signs — as with the buyout of WM a few weeks ago — that debt finance is a little bit easier and more ambitious. But it is still generally tight, and none of these acquisitions are being done with a quick exit in mind. There might be even more activity but vendors are even now still reluctant to drop their prices to the levels that private-equity houses are willing to pay.
There were signs a few months ago of what the industry calls realism — that vendors were beginning to weaken, but the recent bounce in the stock market has put a stop to that. Whether permanently or just until autumn remains to be seen.
Where there is activity though is where American corporations with problems of their own have decided to selling off overseas assets. Interestingly, European companies, which may or may not be similarly distressed, show much greater reluctance to sell at this stage.
There is also some news to gladden the heart of Gordon Brown. According to some within the industry, the UK is in the process of becoming the venture-capital centre for Europe.
Perhaps because it is counter-intuitive given our problems, it is not something much commented upon here. It has, however, been widely noted on the Continent that Britain remains a magnet for French, German and other entrepreneurs.
While London-based hedge funds threaten to leave because personal tax will shortly rise to 50%, these European entrepreneurs are coming here because they like the 18% capital gains tax.
That does not seem like a bad exchange, given that their favoured sectors include technology, anything that offers “ to do more for less” and clean tech — meaning stuff which cuts energy costs and carbon footprint.
But life it still not without its clouds. The industry has got very wound up about possible restrictions on its ability to raise new money which are implied in a draft European directive, and more surprisingly perhaps it is also concerned — as indeed is much of the City — at the prospect of a Conservative government that does seem to have some strange ideas.
In particular, shadow chancellor George Osborne recently floated the idea that debt interest should no longer qualify for tax relief. Chances are he will forget about it in the excitement of actually getting into office. But if not, then in the words of one private-equity expert, “we might as well hand back the keys”.
