Tonight:
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The private-equity purchase of sandwich shops chain Pret a Manger at the end of last week has told us two things about the current state of the markets. First, it is still possible to get private-equity transactions done. Second, the imminent changes in capital gains tax are concentrating the minds of those seeking to sell their businesses and giving them a serious incentive to get deals completed within this tax year. The implications of this are examined in the second note in this column.
Simon Walker, head of privateequity trade association the BVCA said at a seminar at Cass Business School last week that the fourth quarter of 2007 was the slowest for privateequity deals in almost five years. Only £3 billion of transactions were completed, down from £15 billion the previous quarter.
But he added that it is a mistake to think the whole sector has ground to a halt, because levels of activity vary considerably according to size. The market is still vigorous, he said, at the bottom of the scale, where deals range in size up to £100 million.
It is harder in the middle category, where deal sizes are from £100 million to £1 billion, and which would include Pret. Although this sector has been affected by the changed conditions in the credit markets, there are these occasional signs of life, particularly where the assets being purchased are high-quality and non-cyclical, Walker added that the valuation of the business is likely to be rather less than it was six months ago, and the financial structure of the deal is expected to containmore equity and less debt than we have come to expect.
It is interesting too that Pret is very much a buy-and-build deal with the aim of going for very rapid expansion here and overseas. This is not a business in trouble that needs an injection of management and financial discipline. Those companies exist, but the private-equity industry seems willing to wait for them to get a lot cheaper before moving in. Private-equity traditionally has done best when buying businesses at the bottom of the cycle.
It is where the deals have a value of more than £1 billion that the change has been most marked. The investment bankers are virtually on strike and refusing to facilitate the financing of any of more of these private-equity mega-deals. They are unlikely to change their tune until they get rid of the hundreds a of millions of loans stuck on their books from their role in financing earlier buyouts and which they heldwhen the market broke.
Buyers among the investment houses are only willing to take this debt at a price that would involve the investment banks booking a significant loss - which they are for the most part not yet willing to do. At the current rate of progress - or lack of progress - the market for big deals could remain seized up for much of the year.
AN accountant of my acquaintance has had the most depressing three months' business he can recall, although he has never been so busy.
Normally, this time of year would be taken up with auditing the accountants of clients with a 31 December year-end, and sending out reminders to personal clients to use up their personal allowances, Sipps, Isas and so on. This year, though, he has been rushed off his feet by people trying to sell out.
He claims that, without exaggeration, perhaps a quarter of his corporate clients - and inevitably it is the brightest and most successful quarter - have put their businesses up for sale or rushed through a transaction. None of these had displayed any desire to sell out until last autumn when Chancellor Alistair Darling announced his capital gains tax reform. The prospect of the neardoubling of capital gains tax from 10% to 18% for entrepreneurs is what has sent them rushing for the exit. Darling has caused a whole generation of entrepreneurs to lose heart.
These changes have got a bit lost amid all the railing about non-doms, but the reality is that they will probably do as much damage by the time they have run their course. This is not just because of the mass abandonment of business by those selling out but also because no one seems to have thought through what will happen when it becomes established that the top rate of capital gains tax at 18% is so much lower than the top rate of income tax at 40%.
I am old enough to remember when Nigel Lawson unified the two tax bands and regarded it as one of his most worthwhile achievements because it put a stop to all manner of artificial transactions designed to convert income into capital gain for tax purposes. Now they will all start again. The supreme idiocy of Darling's so-called capital gains tax reform is that it creates the opportunity and incentive for serious artificial tax avoidance where none previously existed.
