Additionally, two-thirds of respondents believe more PE-backed businesses will breach banking covenants in the year ahead even though the availability of debt finance has improved somewhat from the dire position of last year.

Brian Livingston, Head of Private Equity at Smith & Williamson, commented:
“Our survey found that deal volume does not yet appear to have increased significantly across the board since 2008, although expectations for the end of 2010 are slightly more positive. The market still appears fragile, with mixed experiences and no clear consensus on direction in a number of areas. We believe that relationship banking is making a comeback compared to the more commoditised approach to debt of recent years.”

Regulation, regulation, regulation

There is clear negative sentiment in the PE community over increasing politically-inspired regulation and only 4% believe that examples, such as proposals for greater transparency and disclosure, will not increase in the year ahead. For instance 54% of those surveyed agree that the AIFM Directive will have a severe impact on the PE industry.

Just over half of respondents, believe the lack of funds being made available to SMEs is having a detrimental effect on the PE community while approximately, two-thirds believe that tax breaks to encourage investment are desperately needed.

Additionally, respondents don’t feel that the economic climate is improving and only 22% agreed that the change of government will be a major boost to the industry.

Bank debt - a lottery?

While only 23% felt that it hadn’t been easier to raise debt finance this year than last, two-thirds anticipate that more PE-backed businesses will breach debt covenants in the current year. Half of respondents reported that, to date, banks have generally not acted helpfully when covenants have been breached.

When asked to nominate the most active bank for lending over the last year, various PE houses put forward RBS, HSBC, Lloyds, Clydesdale/Yorkshire, The Co-Op and non-traditional sources. The fact that no one bank is dominant in lending once again highlights the disparity of opinion and experience.

Livingston commented: “Relationships increasingly matter. Aligning the company’s interests and needs with that of a PE house and a bank has become ever more complex. Some houses are investing, but not in all sectors and equally some banks are lending but not to all companies. Finally, not all banks will deal with all PE houses.”

Competition for scarce transaction opportunities

2009 completed transaction numbers appear to have dropped even from 2008 levels. However, almost half of respondents believe that completions in 2010 will be higher.

Livingston noted: “Two-thirds of respondents reported a shortage of suitable target companies. But who said finding investments to return consistent c 30+% IRRs was meant to be easy?  Absolutely top quality businesses appear to be attracting a scarcity pricing premium, while other businesses of lower quality are getting offers at a substantial discount or are unsaleable. It is critical to present the right investment proposition, whether seeking investment or looking to exit.”

Opinion is divided almost evenly as to whether entry price expectations have become more reasonable since the credit crunch or that entry multiples will change significantly this year.

According to Livingston “Drawing generalisations remains difficult: while overall debt financing still appears cautious, every major UK bank was reported to be the most active lender by at least one private equity house. Interestingly, while almost half of PE executives feel that the PE houses themselves are more positive than last year, 61% felt that investors in PE are more cautious this year.”

Details of the survey

The survey gathered responses from 102 private equity senior executives (at 67 different mid-market (£5m-£50m) PE houses) between Friday 25 June and 25 July 2010.

For further information contact:
Brian Livingston, Head of Private Equity, Smith & Williamson
Direct Line: 020 7131 4914
Mobile: 07764 822398
Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

PR enquiries:
Matthew Rowe, tel: 020 7131 4550
Kate Harrison, tel: 020 7131 4228

Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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