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It is fair to say that 2008 was not a vintage year, extraordinary, catastrophic maybe; the thesaurus of adjectives used by journalists, politicians, and individuals to describe the ‘credit crunch’ has been worn thin. The only people who may disagree would probably include insolvency lawyers, practitioners, and administrators who have had a glut of retailers and banks to feast on. No longer are they enviously looking across to their M&A and real estate counterparts; at least the recession is over for some.
According to Grant Thornton ‘the value of deals involving UK and overseas private equity plummeted 76.5% from £53.6bn in 2007 to just £12.6bn, the lowest level since 2002. Its demise reflects the evaporation of bank lending and general confidence over the year with a collapse from Q2 deals worth £5.7bn to just £310million in Q4’.
Clearly this is not going to change overnight. Banks are under pressure to increase capital relative to their loans and assets whilst also keeping interest rates on savings at a reasonable level and also continue lending to businesses, SME’s especially. Added to the fact that many previous aggressive lenders to Private Equity backed buyouts (Kaupthing, Landsbanki, HBOS etc) are no longer lending or able, deal-makers are faced with a dearth of available credit. The traditional private equity deal structure may have to change in this current climate.
As a contrast to these depressing statistics we have seen record levels of fund raising for distressed debt private equity and hedge funds. Oaktree Capital announced a record $10.6bn fund raising, TowerBrook $2.75bn, and Alchemy $1bn adding up to a massive $26bn since October 2008. This only exemplifies the current climate, but also points to possible reason for optimism.
Businesses will be put under severe pressure and be faced with myriad of problems especially those with large debt burdens and weak cash flow, but it is these situations where private equity has a role to play and will find opportunity. Such opportunities will present private equity investors and hedge funds, with big distressed funds, the ability to act as a catalyst for partial recovery in the UK economy whilst hopefully saving jobs in the process. Obviously there end game is to make massive returns and for incumbent management teams the arrival of a hedge fund may not be an enjoyable experience, but ultimately it is seeing opportunity in severe difficulty that will determine how long we are in recession. All this may take some time to come to fruition and significant return on investment will be far from guaranteed with a lot of blood, sweat, and tears spilt in the intervening period with painful restructuring and redundancies being an inevitable consequence.
The role of interim management during this period will be integral to successfully keeping businesses going, restructuring, and turning them back to profitability when sentiment returns. Those with strong restructuring and recovery experience both financial and operational will be in high demand and in some cases an interim manager will be the only option available to businesses. Clearly, there is a lot of hard work ahead, but with a little creativity, a lot of entrepreneurial spirit, and a glass half full outlook that glass with be filled with a vintage once more.
January 27th, 2009 at 3:33 pm
I have heard it said that the Private Equity businesses are sitting on cash waiting for the market to bottom out. Does that mean there will then be a rush of requirements for Interim turnround people? And of course, when should we plan this into our diaries / what should we do in anticipation?
July 16th, 2009 at 8:22 am
Many Private Equity businesses are sat on funds raised upto 2 years ago, some raised just recentely, however, everyone is waiting to see whether the bottom of the market has been reached. It will be a case of everyone waiting for everyone else to break the flat cycle.Another couple of other issues havecome into play, P.E. businesses in many cases paid very high multiples and are now sitting on high negative returns, so some of their spare cash is going to shore up these losses.In buying new businesses they will also have to put in more equity,no longer are they able to get high gearing debt support from the Banks.
So in summary, many are waiting to understand were the Market is going, see some previousely buoyant sectors such as Retail are viewed as toxic and are in some cases P.E firms are still in denial about the trouble some of their businesses are in and therefore Turnaround is not on their agenda as yet.