Wednesday 13 December 2017

Maeve Dineen: Private equity stalks markets again on scent of big profits


DURING the boom, the wild men of private equity rampaged through the public markets. They ventured into the sleepy boardrooms of badly managed companies and stormed the bastion of multinationals.

At that time private equity was charmed. Investors poured record amounts into the industry and bankers did their bit by relaxing the standards on credit. Nine of the 10 largest buyouts in history occurred between 2006 and 2007.

While private equity has been bitten once, it doesn't do shy. And though some of the better-known names were left scarred after investing too early in troubled banks across the globe, buyout shops are lining up for a second shot at finance as confidence picks up again.

Locally, too, we're seeing the merchants of equity re-emerging slowly. CVC Capital Partners, the global private equity powerhouse had been sniffing around the potential tie-up between IL&P and Bank of Scotland (Irl) with a view to investing in the combined entity.

Payzone, the troubled Irish electronic payments company, announced last week that private equity group Duke Capital will invest €45m in the company in exchange for a 69pc share.

SkillSoft, the US technology group founded by Irish entrepreneur Bill McCabe and headquartered in Dublin, also announced it was being taken over by three private equity groups for $1.1 bn. The all-cash deal will see the companies pay $10.80 per share for SkillSoft.

There is no shortage of opportunity -- distressed companies are everywhere. Whole sectors of the economy are weakened by depressed revenue and the burden of borrowing.

This is their bread and butter. Inject equity, rejig the balance sheet with cheaper long-term debt, slash overheads and watch as the economy recovers.

But the buyout industry is grappling with its own range of tough issues as it steers its way through the economic quagmire.

Indeed, analysts at JP Morgan estimate that the number of private equity firms will shrink by 30pc, while others predict a figure closer to 70pc.

The private equity industry is bracing itself for the possibility of tax increases and heavier regulation from Europe that will be seek greater disclosures.

On top of this, many investments now sit in private equity portfolios at valuations that reflect past optimism more than current realities.

There's also the problem of exiting investments into a volatile public offering (IPO) market. And then, of course, the industry also faces a massive refinancing burden as it struggles to raise new funds.

One of the natural evolutionary tracks for private equity-backed groups is a stock market flotation. But this isn't always as straightforward as it was for the likes of packaging giant Smurfit Kappa, which is backed by Madison Dearborn, CVC and Cinven. Smurfit Kappa managed to get its IPO away three years ago without too much fuss.

Last week, however, it was clear that flotations remain fraught with difficulties.

In the UK, private-equity backed groups, including Travelport, where former AIB chairman Dermot Gleeson heads the board, and fashion chain New Look, both pulled flotations at the last minute due to lack of investor demand, casting a cloud over a raft of other potential floats.

Debt is deeply out of fashion at the moment and debt, as we all know, is the big point of private equity. Typically, debt funded 80pc of the transactions carried out during the boom. There is no appetite now for that sort of risk among lenders to stimulate this revival. Listed companies themselves are paying back debt. They, too, are slaves to financial fashion and need to be more so, living in the public gaze.

Chief executives worry that institutional shareholders will take fright of a purchase at the back end of a recession and while they should probably be doing deals, they won't. It's far easier to keep the ship tidy.

And while that leaves the road clear for private equity bosses, like most of the financial industry, those left standing after the crash will have to go back to basics: smaller deals with a lot more cash upfront.

Irish Independent

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