The public-to-private riddle

Despite predictions to the contrary the number of public-to-privates actually plummeted throughout much of 2009. So what went wrong? A primary obstacle that is routinely singled out is the lack of leverage and the pricing mis-match between buyers and sellers. But surely these issues did not apply quite so readily to acquisitions from public markets?

Wrong. As far as the lack of debt is concerned, many now argue that this impacted public market transactions much more severely than deals sourced privately. "Historically banks would give you the debt only once the offer had received 90% acceptance. In the boom years this was often dropped to 75%, but banks were enforcing it again last year," explains Shane Law, COO of Patron Capital Partners.

The crucial point here is that it was hard to get to the sort of acceptance levels required to secure leverage – the scale of the drop in the value of their stock often made shareholders even more reticent to sell.

The other main problem is that P2P deals are inherently more tricky than the average off-market transaction. Stringent reporting requirements, complex legal processes, reduced certainty and increased fees cost: it is easy to see why some steer clear of de-listings altogether.

Change in fortune

But while buying from the public markets was not a big area of interest for much of last year, this seems to have turned around from the final quarter onwards. This is perhaps more than a little surprising given the scale in the recovery of stock prices from March 2009 onwards

The answer, has little to do with stock prices, and more to do with the market backdrop, which has improved over the last six months. Most importantly, the banking sector is in much better shape now this transitional period could be particularly good for financial buyers to act. While banks remain reluctant to lend to smaller firms and rights issues often fail to generate interest a private equity buyer with dry powder can leverage banking relationships to get the deal away and can dangle the carrot of follow-on funding for the future. Furthermore, perhaps P2Ps offer an edge now in that they typically do not lead to same kind of bidding wars that so often plagued the pre-crash market.

The reality is that de-listings will always play only a cameo role. What is equally clear, however, is that when conditions are right the public market can be an attractive place to go hunting, and there are good deals to be had. For this reason investors will always look, but for many it will remain nothing more than window shopping.

To see an extended version of this feature read the March issue of Private Equity Europe.