The significantly increased number of private equity exits in recent months have been attributed to the following drivers:

1. Slow deal flow over the last couple of years has created a high level of pent up buy and sell side motivation

2. Asset prices have improved for most industry sectors

3. Fund raising plans have incentivised firms to prove to LPs their ability to successfully exit transactions and generate returns

4. Investment periods for many funds will end over the next 2 years, prompting GPs to put money to work rather than lose committed capital and management fees

5. The increase in the amount of debt finance available has made it possible to leverage transactions more readily

The significantly increased number of private equity exits in recent months have been attributed to the following drivers:

1. Slow deal flow over the last couple of years has created a high level of pent up buy and sell side motivation

2. Asset prices have improved for most industry sectors

3. Fund raising plans have incentivised firms to prove to LPs their ability to successfully exit transactions and generate returns

4. Investment periods for many funds will end over the next 2 years, prompting GPs to put money to work rather than lose committed capital and management fees

5. The increase in the amount of debt finance available has made it possible to leverage transactions more readily

Traditionally GPs have dedicated significant energy to pricing risk and opportunity on the way in to a deal but significantly less effort in maximising returns at exit. But with far fewer assets of sufficient quality for an attractive sale sitting in portfolios at this point in the cycle, much more care is now being taken in the management of a stellar exit including:

1. Careful assessment of deep industry sector knowledge/ international reach in the choice of intermediaries

2. Well crafted vendor packs

3. Organisation of stable financing

4. Consideration of warrants / deferred consideration

5. Careful management / incentivisation of management

6. Proper commitment to the process

7. Realistic expectations of pricing

For GPs with perhaps one or two high quality potential exits sitting in portfolios, maximising returns from those opportunities is vital. For those who do it well, 07 multiples for these rare high quality businesses are, remarkably, still available.

Given the current low-growth, low leverage environment we’re currently in, PE firms are having to look to different ways to identify risk adverse but still attractive investment opportunities as well as increasing the value of their portfolio companies:

Given the current low-growth, low leverage environment we’re currently in, PE firms are having to look to different ways to identify risk adverse but still attractive investment opportunities as well as increasing the value of their portfolio companies:

• PE firms are becoming more focused on attractive industry subsets but more importantly on identifying quasi-guaranteed revenue drivers

• In particular there are a handful of drivers that separate the wheat from the chaff in most sectors such as: international amplification, government spending exposure, demographic linkage, internet sales amplification, efficiency and cost saving exploitation

• Where GPs can see a combination of risk adversity including secure cash flows over the natural hold period for a portfolio company they will pay a full price

• Niche companies across a multiplicity of sectors that are exposed to these drivers are particularly attractive

Equus and its clients will be delighted to help identify which industry sectors are showing positive exposure to different revenue drivers

There has been, in recent months, a significant up-turn for manufacturers, many of which are backed by Private Equity firms looking to focus their funds on companies that offer significant growth and potential to expand internationally. Signs that the sector’s improving include:

There has been, in recent months, a significant up-turn for manufacturers, many of which are backed by Private Equity firms looking to focus their funds on companies that offer significant growth and potential to expand internationally. Signs that the sector’s improving include:

• The replenishing of stocks indicating a return of long term consumer demand
• Depreciation of the UK currency making manufacturers more competitive
• UK technical expertise in niche areas means they don’t have to compete head on with low cost Asian exporters

M&A activity in the manufacturing sector is increasingly driven by PE firms. Manufacturing businesses fit particularly well with the new PE investment requirement for highly active business transformation as drivers of IRRs/value. Additionally, at exit Ebitda multiples available in the manufacturing sector are often more compelling because of a more natural international buyer group.

With lengthening hold periods forcing IRRs into decline and with an uncertain UK economic outlook and constrained leverage, private equity backers are increasingly seeking to internationalise their portfolio companies as a way of maximising returns.

With lengthening hold periods forcing IRRs into decline and with an uncertain UK economic outlook and constrained leverage, private equity backers are increasingly seeking to internationalise their portfolio companies as a way of maximising returns.

However, there are various challenges in doing so, for example:

1. Can a UK-based private equity firm help a company expand into overseas markets without itself having an international operation?

2. International can mean various things e.g. achieving cost / quality benefits from the use of overseas suppliers, or entering new markets via marketing of existing or new products / services – or transferring operations / manufacturing. Knowing which is the right strategy for a particular company takes experience and a deep understanding of target markets.

3. How can a mid-market general partner ensure that international expansion makes a business more attractive to UK and overseas acquirers? GPs will have to apply greater creativity in finding buyers at optimum multiples. These might include SWFs or investors located in emerging markets outside the traditional orbit of UK based private equity firms.

4. Having to accommodate disparate investment teams, languages, tax regimes, regulatory regimes and so on can be extremely onerous and expensive. Whether it involves the integration of an overseas business or expansion into a new market, implementing a successful international strategy can be a laborious process: investors need to be comfortable that the investment, in time and capital, are worthwhile.

Mid-market PE firms will need to show more initiative in finding new revenue streams that lie outside the traditional sphere of UK based PE firms. Competition for buy-and-build platforms with the potential for international expansion is intensifying, but knowledge of a sector on a pan-geographic basis can assist a general partner in finding high quality investments without overpaying. Post credit crunch, general partners will also need to show greater efficiency in the deployment of capital and productivity of their workforce. Some sectors are increasingly global, such as media and communications where content can be distributed across multiple geographies instantaneously. Natural acquirers of private equity-backed business are often now trade buyers, who are themselves pan-geographic....

New research suggests that ‘fitness’, measured against certain key criteria, provides a significantly more accurate indicator of future success than prior performance as LPs strive to determine which GPs, worldwide, are most likely to out-perform over the next decade.

New research suggests that ‘fitness’, measured against certain key criteria, provides a significantly more accurate indicator of future success than prior performance as LPs strive to determine which GPs, worldwide, are most likely to out-perform over the next decade.

Of significant note is the way in which the research (data provided by HEC School of Management and Dow Jones) adopts a different approach to analysing future performance based on criteria designed to anticipate long-term returns including:

• Quality of deal flow
• Ability to time the market
• Strategic positioning
• Flexibility of deal size
• The level of strategic uniqueness

The study shows that in this low growth environment, with bank lending severely curtailed, companies that have and continue to perform well in these areas will be able to capture some of the most relevant drivers of value creation. Industry sector funds are understood to have a competitive advantage in this landscape. Having an industry specialisation gives a GP several advantages that include:

• An ability to identify the highest quality businesses
• A greater focus and concentration of contacts in a relevant sector
• A better insight as to how best monitor and manage portfolio companies and deliver creative exits

• The UK witnessed more private equity-based M&A than any other part of Europe in the first quarter, according to new research with deals worth €4.7bn (£4bn) in the three months – more than half the €10.5bn transacted Europe-wide.

• Overall Q1 private equity deal making rebounded in the first quarter to its highest level since Lehman Brothers collapsed 18 months ago, highlighting how UK buy-out bosses are expecting an economic recovery.

• How much of this is driven on the buy side by GPs needing to put capital to work ($500 billion in so-called "dry powder") and on the sell side by GPs needing to support fund raisings is the question du jour

• Is this a mini bubble of deal doing at multiples that will prove too racy* as competition heats up for the few high quality businesses available for those who need to show some activity and compounded by interest from trade buyers

• Private equity firms expect to pay higher prices for assets in competitive sectors such as healthcare a survey said on Thursday.

• The UK witnessed more private equity-based M&A than any other part of Europe in the first quarter, according to new research with deals worth €4.7bn (£4bn) in the three months – more than half the €10.5bn transacted Europe-wide.

• Overall Q1 private equity deal making rebounded in the first quarter to its highest level since Lehman Brothers collapsed 18 months ago, highlighting how UK buy-out bosses are expecting an economic recovery.

• How much of this is driven on the buy side by GPs needing to put capital to work ($500 billion in so-called "dry powder") and on the sell side by GPs needing to support fund raisings is the question du jour

• Is this a mini bubble of deal doing at multiples that will prove too racy* as competition heats up for the few high quality businesses available for those who need to show some activity and compounded by interest from trade buyers

• Private equity firms expect to pay higher prices for assets in competitive sectors such as healthcare a survey said on Thursday.

*7.9 times (EBITDA) for a healthcare business at the end of the first quarter, compared with 7.1 times three months earlier * - 6.4 times for companies in the industrial sector, 6.2 for business support and 7.7 for high technology at the end of March. Those are up from multiples of 4.7 for industrials, 5.8 for business support and 7.2 for high technology three months earlier.

Recent deals, such as Cinven's purchase of diagnostics business Sebia, Triton's buy of care homes provider Ambea and KKR's takeover of retailer Pets at Home have showed private equity firms are willing to pay over 10 times EBITDA for what they see as top quality assets.

Recent BCG research suggests that those GPs introducing frequent evaluation of portfolio management will produce superior returns

• Traditionally, the vast majority of operational value creation has been ascribed to optimum choice of management

• In an environment with lower leverage and multiple uptick expectations, management are an even more fundamental part of the returns

• Different types of manager work better in leaner times, others better in expansion times - what systems are GPs putting in place to ensure that they are choosing and monitoring management well to ensure success

• What is the right balance between active GP support and maintaining a distance that allows for the harder decisions to be taken - is monitoring key KPIs enough or is monitoring a more intuitive process

• What systems are GPs introducing that allows for quick identification of internal problems or to respond rapidly to unexpected external influences.

• What are GPs doing in this new environment to change the way management is being incentivised?

• How important is deep industry expertise in monitoring performance effectively

Going forward LPs will focus on those GPs who can demonstrate a track record in operational value creation. Getting management absolutely right must be an increasingly important part of that.

Global M&A activity has showed signs of recovery in February showing an 3.8% increase in the number of announced transactions.

There has been a notable difference in the location of these increases with US reporting a 31.6% increase in the number of deals announced in February and stellar growth for M&A activity reported in Asia with deal count for the month up 19.9%. The number of China M&A deals was up 55.7%, and India reported a 55.8% increase from the prior-year figure.

Global M&A activity has showed signs of recovery in February showing an 3.8% increase in the number of announced transactions.

There has been a notable difference in the location of these increases with US reporting a 31.6% increase in the number of deals announced in February and stellar growth for M&A activity reported in Asia with deal count for the month up 19.9%. The number of China M&A deals was up 55.7%, and India reported a 55.8% increase from the prior-year figure.

Conversely European M&A activity trailed again in February as the monthly transaction count was down 18.2%, with the UK and Germany reporting a 16.5% and 43.3% decline in cross-border M&A activity respectively.

Japan also witnessed a 38.9% decrease in the number of M&A deals reported on a year-to-date basis and a 42.8% drop in dollar volume.

However when concluding, analysts at Baird have said that the cyclical upturn that emerged just over a year ago very much remains intact. The fundamental factors (Federal Reserve Policy, Economic Fundamentals, Valuations) remain largely neutral, and technical indicators (Investor Sentiment, Seasonal Trends, Breadth) remain positive – optimism is returning to the sector.

• There has been a noticeable lack of activity in the mezzanine finance market in recent months. Are there still deals out there? Why aren’t they getting done? Are investors looking to new structures / PIKs / preferred equity capital/ high yield in preference to straight mezzanine?

• Industry commentators currently argue that high yield debt is gaining real traction in Europe and is finally becoming an asset class in its own right with growth forecasted to be between 30 and 40% this year (an estimated €45 billion against €32.7 billion last year). What’s different this time and is there any real likelihood of sustainability or real competition for mezzanine?

• However, while over €8 billion high yield bonds have already been issued this year, these haven’t related to new LBO activity, and instead are being used for refinancing and capex in safe/ steady state businesses. Do market participants expect that to change? Does mezzanine, being much more flexible therefore mostly suit businesses in transformational phases.

• There has been a noticeable lack of activity in the mezzanine finance market in recent months. Are there still deals out there? Why aren’t they getting done? Are investors looking to new structures / PIKs / preferred equity capital/ high yield in preference to straight mezzanine?

• Industry commentators currently argue that high yield debt is gaining real traction in Europe and is finally becoming an asset class in its own right with growth forecasted to be between 30 and 40% this year (an estimated €45 billion against €32.7 billion last year). What’s different this time and is there any real likelihood of sustainability or real competition for mezzanine?

• However, while over €8 billion high yield bonds have already been issued this year, these haven’t related to new LBO activity, and instead are being used for refinancing and capex in safe/ steady state businesses. Do market participants expect that to change? Does mezzanine, being much more flexible therefore mostly suit businesses in transformational phases.

• Is there a natural size break between choosing high yield over mezzanine – recent acquisitions of more than £1bn including Bridgepoint Capital’s Pets at Home and Matalan used high yield - does market participants see mezzanine as the natural default choice for mid-market deals?

• Companies using junk bonds are under equivalent scrutiny and market disclosure as equity, which doesn’t play well with many PE sponsors. Do market participants see this as a material disincentive to use of high yield?

• There have been some recent examples of mezzanine investors taking equity stakes without having to inject cash by proposing early restructurings or by employing aggressive negotiating tactics, e.g. IMO, Gala, Select Service Partner, Sagard and SGD. Is that proving a sustainable and attractive investment approach?

• Moody’s Investor Services research* suggests that smaller managers of European structured loan pools have underperformed their bigger rivals and registered far higher default rates. 7 out of the 10 worst performing managers only managed a single CLO.

• Partly this was driven by a need to “commit” to more difficult syndications in order to access better quality offers. Larger firms enjoyed preferential allocations.

• In terms of picking credits, some managers have been much better than others. The European loan average default rate is 10.2 per cent. More than a quarter of deals reported defaults ranging between 9.5 and 11.5 per cent.

• Moody’s Investor Services research* suggests that smaller managers of European structured loan pools have underperformed their bigger rivals and registered far higher default rates. 7 out of the 10 worst performing managers only managed a single CLO.

• Partly this was driven by a need to “commit” to more difficult syndications in order to access better quality offers. Larger firms enjoyed preferential allocations.

• In terms of picking credits, some managers have been much better than others. The European loan average default rate is 10.2 per cent. More than a quarter of deals reported defaults ranging between 9.5 and 11.5 per cent.

• Importantly where a company defaults on subordinated the senior is counted in default stats even where there is no value attrition, for example in Gala where mezzanine has been equitised.

• Industry is expected to recover somewhat as the loan market picks up with continuing participants emerging stronger from the crisis, but limited expectation of a rapid return to the pre-crisis peak.

• Investment banks are syndicating again but at a much smaller underwrite level – the syndication is developing at bank level with club syndication. Springer/ marken/ flint/ Deb.

• Many CLOs go come out of their prescribed reinvestment periods inside of 18 months meaning there will be an inability to trade out of more difficult assets and impacting liquidity for senior appetite.


* The data appear in the agency’s latest CLO Interest newsletter.

It is well understood that in the pre-credit crunch era, GPs would look to increase the value of portfolio companies through a combination of: leverage, earnings multiple increases and the effective use of management. The value created in portfolio companies was usually ascribed on a 40 30 30 basis (40% of value up lift from debt, 30% from multiple uptick and 30% from business transformation).

It is well understood that in the pre-credit crunch era, GPs would look to increase the value of portfolio companies through a combination of: leverage, earnings multiple increases and the effective use of management. The value created in portfolio companies was usually ascribed on a 40 30 30 basis (40% of value up lift from debt, 30% from multiple uptick and 30% from business transformation).

However given the low growth forecasts for the Eurozone in the foreseeable future, coupled with an absence of significant leverage, the majority of value creation will need to come from management. Some commentators are expecting circa 60% of the uplift in value coming through this route.

So what kind of manager will PE houses be looking to attract to their portfolio companies, given the low growth environment we’re currently in?

How aggressive will GPs be in replacing management? What measures are they taking to recruit talented people in a competitive market, and what kind of remuneration will these managers expect?

A newly published Close Brothers report on Support Services shows M&A activity in this sector held up well in 2009 and is set for continued growth in 2010. Since October 2008 there have been 131 Support Services mergers and acquisitions, totalling over £8 billion. Corporate activity accounted for the bulk of this but private equity has recently roared back to life e.g. Carlyle’s unsolicited approach for Shanks (waste management); Apax’s £975m acquisition of Marken (clinical trial logistics) and Bridgepoint’s £257m acquisition of LGC (forensic and paternity testing) from LGV.

A newly published Close Brothers report on Support Services shows M&A activity in this sector held up well in 2009 and is set for continued growth in 2010. Since October 2008 there have been 131 Support Services mergers and acquisitions, totalling over £8 billion. Corporate activity accounted for the bulk of this but private equity has recently roared back to life e.g. Carlyle’s unsolicited approach for Shanks (waste management); Apax’s £975m acquisition of Marken (clinical trial logistics) and Bridgepoint’s £257m acquisition of LGC (forensic and paternity testing) from LGV.

Support Services companies offer investment criteria that are attractive in an uncertain economic climate: low risk, secure earnings, and strong potential upside as and when the economy achieves sustainable growth. Given the low barriers to entry in some outsourcing activities, markets tend to be fragmented with many small operators, enabling larger companies to diversify into new areas through strategic acquisitions.

While commentators are predicting that 2010 will see increased M&A activity, there is little consensus on the sectors that will be first to attract investors.

While commentators are predicting that 2010 will see increased M&A activity, there is little consensus on the sectors that will be first to attract investors.

• Clearly, with the UK and continental European economic outlook still uncertain, buyers will be looking for businesses and sectors that offer low risk, secure earnings and strong potential upside, as and when the economy achieves sustainable growth.

• One such sector is Business Services, which saw continued M&A activity in 2009, and looks set for further deals in 2010.

Amid the gloom of the recession there are signs of reasons to be optimistic about the UK manufacturing sector. Many economists point to the growth in exports in the early 1990s that helped the UK economy grow again off the back of a depressed exchange rate and are predicting a similar story this time. Despite the trade union heralded decline in employment in the sector, the UK manufacturing sector consistently creates market leading champions that either go on to become European or Global leaders in their own right or as part of larger concerns.

Amid the gloom of the recession there are signs of reasons to be optimistic about the UK manufacturing sector. Many economists point to the growth in exports in the early 1990s that helped the UK economy grow again off the back of a depressed exchange rate and are predicting a similar story this time. Despite the trade union heralded decline in employment in the sector, the UK manufacturing sector consistently creates market leading champions that either go on to become European or Global leaders in their own right or as part of larger concerns.

This potential has not been missed by the more successful private equity firms who have been investing in market leading niche manufacturers for years despite the sector being seen as unsexy by many other investors.

One sub sector of manufacturing that has consistently and continues to offer good investment potential is defence. Canny private equity investors have generated strong returns from niche defence players in recent years, and are expected to invest further.

While the massive capital programmes for ships, planes and tanks are mostly the province of the very largest manufacturers smaller niches with repeating revenues offer significant potential returns. Areas that are being actively targeted by UK GPs include soldier modernisation and protection, tracking and monitoring, cyber warfare protection, and coastal and border security. GPs that have already successfully invested in this sector will continue to have a significant competitive advantage in being able to originate high quality investment opportunities.

The mix of attendees at Super Return this year is interesting in itself. While some of the larger funds are present the impression is that the mid-market is front of mind for most, for unsurprising reasons perhaps, but the detail on the outlook for that market segment is illuminating.

The mix of attendees at Super Return this year is interesting in itself. While some of the larger funds are present the impression is that the mid-market is front of mind for most, for unsurprising reasons perhaps, but the detail on the outlook for that market segment is illuminating.

Most attendees agreed that last year most of what was being offered as deal opportunities in the mid market was of mixed or poor quality but that now better businesses are being offered. Sources are primarily non-core asset disposals by corporates but there is an anticipation that the banks will begin to open up. Last year there were more than a few debt for equity deals; this and next year will see the banks seeking exits particularly as the workout departments now have the staffing numbers to manage the process. Those businesses that need an equity fix but where they don't need any operating restructuring will be attractive. At present it is possible if difficult to get debt and terms look like 3x on senior with pricing at 5 to 8x ebitda and 4 to 510 basis points on debt.

Returns going forward will increasingly come from active change but with leverage and multiple uptick still making a contribution. Change will come from a combination of build-ups, internationalisation, professionalisation of operations, new revenue areas and investment in technology. Large end managers will have less of a chance to change companies. Exits will be mostly to trade buyers.

Fund raising is improving with the denominator effect slightly gone away but LPs have an increasingly rigorous focus on a differentiated model and one where execution discipline remains throughout the life of the fund and where interests are wholly aligned. There is a perception that no one model is right and that those who got through this recession well will get LP support going forward, having proven therefore that their model works. Market timing is still a huge issue - if you read the market right you will have an attractive proposition. But it is important to have clear differentiation whether its the efficiency of your origination strategy, industry sector competence, exit management excellence and so on. The important requirement is to set out your strategy and stick to it over a long period. Many will have multi-specialisms but everyone will have to go deeper and deeper into fewer things.

The Super Return mid-market day threw up some illuminating impressions

The Super Return mid-market day threw up some illuminating impressions

• Although the last couple of years have been very difficult for the Private Equity Industry, there is a consensus among attendees across the board in the GP, LP and intermediary camps that there’s nothing wrong with the model per se.
  
• However there is a consensus that in these stricken times, different areas of the private equity industry have to adapt to these difficult market conditions and consequently there is a drive towards greater specialisation in particular in the mid-market area where houses will need to focus on one or two industry sectors. This has inevitably led to a greater focus on those industries which are less affected by macro issues. There is a fear that generalist private equity houses which fail to specialise will fall into trouble in the longer term.
  
• This shift in focus means that companies that have been through cycles before are likely to be more attractive to LPs who will be assessing in greater detail what are the residual values of different funds and within these funds which businesses are trading well, whilst GPs will be scrutinising what multiples they will potentially get when they sell.
  
• The potential returns on offer are particularly important as many GPs are under pressure to sell having had little activity over the course of the past eighteen months. Although the mid-market sector is a few points off, it’s still historically quite high. Exit risk is amplified by the fact that valuations are still high despite the high level of economic risk that the market continues to pose.
  
• The macro-economic indicators are for the first time since 2007 beginning to look positive with the market hopefully settling towards the end of 2010. Multiples should hold up and the European mid-market Private Equity Industry might well have outperformed the US.
  

The Super Return secondaries day threw up a mixed picture for 2010.

The Super Return secondaries day threw up a mixed picture for 2010.

• 2008 and 2009 melt down avoided for PE but very quiet for completions in secondaries or primaries. Valuations dropped fast in Europe while in US they had some wriggle room with DCF valuations and averaging. Low visibility of corporate earnings meant low pricing and volume in the secondaries market. Expectations that there are plenty of companies which are still over leveraged and may fail. Slow draw downs equated to less pressure on LPs to sell particularly as equity markets improved. More secondaries funds raised but little invested. 66% of deals completed by non-traditional buyers while pricing was at an average 60 to 80pc discount.
  
• Outlook for 2010 directed partly by improving valuations. Well managed assets / funds emerging strong with steady counter cyclical properties. However, those with troubled assets are making overall pricing and visibility still tricky. Sellers will mostly be focusing on portfolio management, not potential distressed opportunities given less pressure to sell. However, there are some LPs in the asset class that now need an exit route as they can’t commit to it long term. Continued well-funded deal flow will return in particular as stock markets recover and the associated denominator effect. There is likely to be more buyers in the space, with early secondaries buyers being targets of fund of funds and LPs. Mature pieces will go to transaction specialists - much tougher to diligence a mature funded piece - pricing 30 to 40pc discounts and more competition will push prices up. However, while NAVs are now improving, spreads have remained wide because clarity still difficult. Some GPs are trading at close to par while others who are less favoured are still at heavy discounts. LPs are now putting pressure on GPs to invest. The mid-market has the highest demand and most competition. It is argued that big end funds will see a bigger bounce whilst others see a more difficult time for larger companies. Few know the mid market well enough to price accordingly. More is known about the big end but it presents a much bigger risk. Banks will need to transact at some point. They will need to recognise that best prices won't be available through plain vanilla transactions.
  
• The questions remains, what sort of recovery are we looking at and in what part of the world? Some may be sitting on assets for a considerable length of time with few distributions. Fundamentals of the asset class are improving but pricing is driven by the level of competition. Some buyers are cautious but don’t want to be left behind if 2010 proves a great vintage year.
  

A plenary session this morning at Super Return challenged attendees to be more optimistic about the asset class.

David Rubinstein suggested that Private Equity is in pretty good shape albeit not without problems to overcome. Over the course of the recession commentators, law makers and others had anticipated the asset class would experience many large bankruptsies, be responsible for significant job loss, with multiple PE firms blowing up, LPs defaulting in droves and huge and heavily discounted volume in the secondaries market as financial institutions sought liquidity. Banks would be forced to sell toxic leverged loans, NAVs would sink like stones, deal volume would tank and fund raising dry up.

While deal volume and fund raising did indeed take a long breather and distributions fell globally from an average $15bn per quarter to $2bn no major PE firm went out of business, LPs didn't default except in rare cases, secondaries distressed volume was minimal, there were very few PE backed bankruptcies.

Looking out nonetheless we can expect some significant change in the industry. Governments are planning some constraints on PE with the Volcker Rules in the US and the EU directive in Europe. Both are material but not as bad perhaps as some had expected. Deals are coming back and the exit market is opening particularly through the IPO route. Pricing is at a more sensible level as are debt multiples. Leveraged loans are also beginning to come back even though they may involve clubs and take longer to organise. Preqin data says are investors are ready to come back for the right manager and valuations have been steadily rising for several quarters.

The industry is shaping itself differently for its new environment. For many the emerging markets are becoming a bigger part of scene. Minorities are increasing. Strategics will become a bigger part of the exit landscape. Losses will continue to be a feature of the environment for some time and it will still take between 2 and 4 years to recover. Going forward the industry may have to accept more modest returns from pre recession deals but 09 and possibly 10 will be great vintages.

Overall the industry probably shouldn't be complacent and think that the recession has swept away the need to keep working on a positive impression of the asset class among the wider stakeholder community. Transparency and governance remain key to long term success. The industry should stop seeing itself as private.

The restructurings of troubled corporates look as though they are benefiting from a cheering dose of consensuality:

The restructurings of troubled corporates look as though they are benefiting from a cheering dose of consensuality:

• Burton's Foods restructuring plan has been unanimously approved by lenders.
  
• Hilding Anders has secured requisite approval for covenant and mezzanine equitisation amendment.
  
• Independent News & Media has signed a formal debt restructuring agreement with an ad-hoc bondholder committee.
  
• Park Resorts Limited (UK) has completed its debt restructuring.
  
• Incisive Media syndicate has signed all documentation regarding the company’s restructuring terms.
  
• Monier Group's financial position significantly strengthened following successful closing of restructuring.
  
• New on the block is Deutsch Engineered Connecting Devices which has lined up Houlihan Lokey as financial adviser in anticipation of a debt restructuring.
  

But, looking out over the next six months, for some private equity sponsors this continual outing of troubled assets may prove the beginning of the end. Survival is likely to be determined by a simple computation of how many problems companies have and how much time (ie money) they still have to achieve respectable returns before they hit the fund raising trail/wall. The accelerating outlook for blow ups as lenders seem increasingly happy to take control will start to lift the veil.

In a week where pundits various suggested that next week could see official confirmation that the recession has ended others have called a rebirth of the leveraged loan market:

In a week where pundits various suggested that next week could see official confirmation that the recession has ended others have called a rebirth of the leveraged loan market:

• UK economy improving - latest unemployment figures not as bad as expected, house prices strengthening, September retail sales up - third-quarter GDP figures will released next Friday which may confirm growth of 0.1% compared to the previous quartern thereby officially ending the recession.
  
• Banks in the US and Europe have issued $7.5 billion of high-yield loans since July 1 to finance acquisitions, more than double the amount in the second quarter and more than four times the figure in the first quarter, according to Standard & Poor’s LCD.
  
• In the US the LBO market is coming back. Access to financing has improved and financing is more reasonably priced than it had been. The S&P/LSTA 100, which tracks the 100 largest dollar denominated leveraged loans, climbed to 85.55 cents on the dollar this month, from a low of 59.2 cents in Dec.
  • Blackstone bought Anheuser Busch’s amusement park unit for c $2.7 billion in the largest private-equity deal this year.
    
  
  
• Europe is also seeing an increase in leveraged loan deals.
  • CVC coralled c$1 billion in senior debt from bank club to support its AB InBev’s breweries deal in central and eastern European valued at $3.03 billion in Oct.
    
  • Montagu Private Equity LLP is understood to be arranging more than 100 million pounds of leveraged loans on behalf of bidders interesting in buying Survitec.
    

Chairing a panel yesterday on ‘genuine differentiation and the power of brand’ at the inaugural Real Deals Mid-market conference gave Equus a great opportunity to test whether attendees believed the differences between GPs were artificial or substantive, whether external audiences bought into brand differentiators and how committed people were to getting their messages across.

Chairing a panel yesterday on ‘genuine differentiation and the power of brand’ at the inaugural Real Deals Mid-market conference gave Equus a great opportunity to test whether attendees believed the differences between GPs were artificial or substantive, whether external audiences bought into brand differentiators and how committed people were to getting their messages across.

There were no sacred cows in our debate and we are delighted to report the unanimous summary view that GPs are all special, in their own way, and that it is perfectly possible to persuade people of those vital differentiating characteristics. Furthermore in a fund raising environment that continues to be tight, where credit markets are loosening but still tough and in which management teams and vendors are perhaps more suspicious than they were about PE backing, the collective view was that it is much more important to spend resource and budget on marketing and communication now than it was say 2 years ago.

LPs are taking greater care to finesse their allocation choices, management teams want to hear about what sets potential bedfellows apart, intermediaries increasingly need to finesse processes and banks are much more particular about who they’ll support. Brands matter more than ever and as communications and marketing specialists we have to say thank goodness for that!

Is there life yet in the CLO fund management business?

Is there life yet in the CLO fund management business?

• Most financial institutions are trying to rid themselves of hoppers of syndicated debt
  
• A variety of opinion exists but players either believe the business is in structural decline, that the market will consolidate into the hands of fewer players who can take advantage of benefits of scale, or that the market will come back with freer credit markets and more M&A
  
• For those willing to take the second and/or third position there are deals to be done as bid/ask spreads on assets finally narrow
  
• Against that fundamentals may deteriorate further with more defaults and structural requirements to protect senior note holders at the expense of junior with an associated impact on fees to the manager
  
• The CLO market exploded from 2004 but now seems set to see many players exit the market or be subsumed into larger concerns – some deals have already completed and the pace seems set to increase
  

Richard Wilson, the new Chairman of EVCA, also launched its first Mid-Market Buyout Forum.

At the conference this morning, delegates spoke about what GPs need to do in a tough fundraising environment. Key touchstones included:

• concerns that GPs may have known about portfolio issues a long time before they communicate with their LPs
  
• Whether GPs have the right level of resource and skills required to manage portfolio issues
  
• Whether GPs have a clear and diligenceable fiduciary mindset and intent to fight to preserve capital
  
• To what extent GPs in these maturing markets have specialisation and focus. Pure generalists will struggle
  
• Team configuration - built for purpose teams will be more attractive to LPs than trying to fit pre-existing teams to new conditions.
  
• GPs need to demonstrate models based not only on real transformation skills, less reliance on multiple arbitrage or leverage - but be able to demonstrate that fellow potential LPs in a new fund are committed to the asset class, communicate well on their portfolio at a significantly more detailed level including NAV modelling, covenant tests and debt maturity dates.
  

LPs are demanding far more from private equity firms and those who do not make the effort to meet their needs will struggle to survive

A variety of interesting issues were flagged up at the EVCA’s inaugural Buyout Forum recently, but of them perhaps the most interesting were firstly the paucity of real understanding of the potential impact of the EU’s now all but inevitable Alternative Investment Fund Management Directive and secondly an almost absolute lack of involvement from LPs in influencing its final outcome.

A variety of interesting issues were flagged up at the EVCA’s inaugural Buyout Forum recently, but of them perhaps the most interesting were firstly the paucity of real understanding of the potential impact of the EU’s now all but inevitable Alternative Investment Fund Management Directive and secondly an almost absolute lack of involvement from LPs in influencing its final outcome.

On the first point attendees might be forgiven for not having a sense of the full impact given that the directive itself is a living beast that changes according the latest conniptions of its framers. Nonetheless an understanding of the outline impact might have been universally expected.

On the second point LPs might have been expected to be motivated to influence the impact, in so far as they are able, of the final directive on an asset class for which many have been such fervent supporters over the last decade and with which their interests remain aligned. Structurally PE remains a small subset of their allocations and perhaps it is difficult for LPs to be able to make public proclamations, nonetheless, these are the masters of large capital pools who should be making their presence felt behind the scenes.

Additionally, delegates heard that the private equity industry has been poor at communicating its positive attributes and has historically not worked well with MPs, MEPs and European Local Government to showcase portfolio companies in their back yards. Taking care of its transaction and regulatory environment should be a huge priority for industry participants. Perhaps it is partly because of this that the private equity industry is being tarred with the brush of other segments of the financial sector, the most regulated of which were found out to have created the sort of systemic risk that is at the heart of regulators’ concerns.

In his keynote speech at last week’s inaugural EVCA Buyout Forum Roger Bootle, the economist, spoke of the issues facing the global economy that touched on the lending environment, public sector debt levels and quantitative easing. Some of the key points were:

In his keynote speech at last week’s inaugural EVCA Buyout Forum Roger Bootle, the economist, spoke of the issues facing the global economy that touched on the lending environment, public sector debt levels and quantitative easing. Some of the key points were:

• Although no-one is lending, no-one really wants to borrow in the current climate. There is a mixed message coming from the government, on the one hand Lord Mandelson says the banks should be lending to small businesses whilst Lord Turner says capital ratios need to be improved – what is understood is that banks will continue to be cautious.
  
• Public sector debt as a percentage of GDP shows Italy and Japan in dire straits, the UK is also looking sick. There are still questions over the government’s reaction to the credit crunch and how it will affect sustained economic growth which ultimately is the only way debt will be paid down.
  
• The main worry we should have is about deflation. All bank issuance has done is slosh money around and artificially hike up asset prices. Bond markets are currently over valued because of quantitative easing and may see yields get even lower as assets are over priced. What happens when quantitative easing ends, will the artificial bubble then burst?
  
• Cutting costs and jobs simply reduces consumer spending and that will have a deflationary effect on GDP.
  
• Current account surpluses in some countries such as China, Saudi Arabia and Russia may see money coming into our system but if history is anything to go by protectionist stances on the part of recipients may get in the way.
  
• The irony of the proposed additional regulation of the alternative asset industry is that the most regulated part of the financial sector (ie the banks) were the cause of the problem compounded by the entirely regulated quoted equity market – investing institutions either egged on listed banks to greater excesses or made no effort to restrain management - and yet it is the Alternative Assets industry that will bear the brunt of the EU’s scrutiny because of the seeming indecency of the wealth created historically and the outlook for defaults.
  

He left the stage with a couple of predictions; interest rates will not change for around 5 years and on currency valuations suggested that the Dollar may well rise, the Euro most likely fall and Sterling, having already seen its big fall may drift up.

Private equity firms transforming businesses through careful build up strategies are key to chasing alpha in the new world order

The debate surrounding which PE firm will be around in five years continues to preoccupy many an investor. LPs will be watching closely to see which managers can adapt to current and future markets, put money to work despite a difficult environment and be among the earliest in starting to return rather than just draw down cash. Those GPs will increasingly differentiate themselves from troubled competitors on the wrong side of the performance divide.

While exit horizons are being lengthened as private equity firms wait for valuations to recover, private equity executives are therefore concentrating on improving portfolio companies performance, using existing cash flows and debt facilities with some further injection of equity capital, to target add-on acquisitions.

In the absence of platform investments, build-ups are becoming more and more important, with deep sector knowledge an increasingly vital part of their success. Understanding industry sector trends and developments; being able to win over the best management because you speak the same language; leveraging broad and deep industry relationships to avoid auctions; creating real value through intelligent business transformation strategies; all of these factors give the edge to funds that rely least on leverage and earnings inflation.

But it remains vitally important that GPs identify quality businesses with a strong strategic fit and a stable platform from which to grow. A study by Cass Business School of over 3000 acquisitions between 1984 and 2008 shows that those companies who made add-on acquisitions of healthy businesses outperformed those that bought distressed or insolvent rivals. So despite the market often viewing add-on acquisitions as value-enhancing, it is crucial that GPs and their portfolio companies do their homework before committing to a transaction.