The economic climate should be a hotbed for all-equity investments, but the data disagrees. Anneken Tappe reports

European economic activity is dire, which makes life extraordinarily difficult for investors. Historically, crises have catalysed a spike in all-equity deals. Such persistent bad news, combined with banks' reluctance to lend should again point towards an increase in all-equity deals.

Finally average deal size - which has decreased heavily since 2008 - should also translate to more all-equity transactions: smaller deals are more likely to be all-equity for the quite apparent reason of lower capital requirements.

However, unquote" data gives quite a different picture, with the proportion of all-equity deals steadily decreasing since 2009. This is in stark contrast to the 2008-2009 crisis period, where all-equity deals witnessed a steeper increase. But since 2009, the curve slumps to pre-crisis levels.

So what gives? A possible explanation could be that the current market volatility is forcing pessimism across the industry. GPs may believe, rightly or wrongly, that as conditions worsen, debt will be more expensive to come by. To boot, there is a widely talked about wall of refinancings on the horizon. So buyout houses are getting the debt while they can.

However the graph above shows yearly averages, which are lumpy. If we instead consider quarterly averages, the picture may be different. For example, this May's mini-bubble is visible with all-equity deals falling to just a tenth of the number of buyouts done. But even if we assume this month to be exceptional, there is still a persistent downward trend in all-equity investments. Year-to-date 2011 numbers (averages) are on par with 2007, just before the run on Northern Rock. Incidentally, the period immediately following that saw the proportion of all-equity deals to rise rapidly.

This could mean that the panic about expensive debt is somewhat unfounded. With overall deal value approaching 2003 levels, and the rate of all-equity deals continuing to decrease, debt must be a lot cheaper than the market sentiment makes it out to be.

Industry developments remain unpredictable until there is a more positive message from the markets and banks regain confidence. Present data suggests a clash with the current industry sentiment and complicates forecasts for the near future.