Press Room
Grant Thornton's Private Equity Barometer finds that 81% of
private equity firms to see portfolio firms default
Managing debt exposure for portfolio companies continues to be a
major issue to UK-based private equity firms, according to Grant
Thornton's Private Equity Barometer. In the quarterly survey of
more than 100 private equity executives, 81% conceded that some of
their portfolio companies would breach banking covenants, while
only 19% did not expect any of their portfolio companies to breach
banking covenants.
"We will see an unprecedented wave of financial restructuring of
private equity-backed companies, with banks ultimately taking
control and ownership of some over-indebted companies. A
significant proportion of respondents will require to refinance
some of their portfolio companies and more than half of our private
equity clients expect difficulties in achieving the refinancing,"
commented Mo Merali, head of private equity at Grant
Thornton.
52% of the private equity professionals taking part in the survey
agreed that they would encounter difficulties refinancing some of
their portfolio companies. 18% denied facing difficulties
refinancing some of their portfolio companies, while 30% neither
agreed nor disagreed.
Merali added: "The findings indicate a significant shift in private
equity firms' acceptance of the reality of the situation facing
their portfolio companies. The key challenge is what they can
or will do about it".
In response to their views relating to lenders only 18% of
respondents believed that their lenders have been unsupportive, 86%
of respondents also agreed that lenders are imposing high fees to
reset covenants and high margins on renegotiated debt (6% disagreed
and 8% were neutral). One respondent even commented that
"Lenders have the power and we have to get used to it!"
PRIVATE EQUITY VOLUME TO INCREASE FOLLOWING DROP
"About three quarters of our private equity clients expect to
acquire new companies over the next twelve months, even though some
will need to write off existing investments," Merali
observed.
More than 73% of respondents expected an increase in the number of
companies in their portfolio over the next twelve months, compared
to 19% who said the number would remain static and 6% who expected
to see a decrease.
In line with the expected increase in portfolio companies, 70 per
cent of respondents expected the volume of private equity
transactions in the UK to pick up in the next twelve months.
"It is hardly surprising that the majority of respondents expect
the volume of private equity transactions to pick up, given the
historic lows in transaction volumes reported very recently," said
Merali.
Only 3% of respondents expected the volume of equity transactions
to decrease, while 27% said that it would stay the same.
The results show that respondents are significantly more optimist
than in previous quarters: in Q1 a majority of 64% had expected a
decrease in the number of deals, while in Q2 the number of
respondents expecting a decrease was still at 20%, whereas only 3%
expect a decrease in the current quarter.
"There is certainly more optimism in the financial markets which is
spilling over into deals as we have certainly seen a pick-up in
activity. However the key question being asked by many people
is whether this is sustainable into 2010" added Merali.
Regarding the year-to-date, 68% of respondents conceded that the
number of transactions have decreased compared to the first three
quarters of 2008, while 19% said that the number of transactions
stayed the same and only 13% have recorded an increase.
STAFF LEVELS AT PORTFOLIO COMPANIES TO REMAIN STEADY
"Half of our respondents are telling us that they do not expect to
see any changes in the number of staff employed by their portfolio
companies, while 28% even expect them to hire more staff. Private
equity firms appear to be optimistic about the outlook of their
portfolio companies in spite of their difficulties to refinance
them. This is an encouraging sign and is further evidence
that private equity firms can play a significant role in
stimulating growth," said Merali.
In Q3 respondents were more optimistic on the number of employees
at their portfolio companies then they had been at the beginning of
the year: 51% of respondents expected the number of employees to
remain unchanged in the coming twelve months, while 28% expected an
increase in the number of staff and 21% expected the number of
employees to fall.
By contrast, 46% of respondents to the survey in the first quarter
had said that they expected the number of employees in portfolio
companies to fall.
POOR EXIT PROSPECTS DON'T QUASH HOPES ON RETURNS
"About three quarters of our private equity clients admit that they
are delaying the sale of their portfolio companies and that they
expect the prospects for exits to remain poor in the coming months.
At the same time, almost a third of respondents expect to achieve
annual returns of more than 25% in the next three years," Merali
pointed out. "That is a positive outlook on existing
investments and more importantly a strong indicator that private
equity firms will look to invest in new opportunities and generate
substantial returns on those."
Only 7% of respondents expected to generate annual returns of less
than 10% for their investors in the next three years, while 61%
expected to generate annual returns between 11% and 25%.