2010: year of consolidation

Xavier Wauthier, Associate, ING Corporate Finance

Throughout 2009, we have seen that banks have again become keener on lending. This means that the individual tickets have grown, although they are not up to the levels seen prior to the market turmoil. For 2010, we feel this return to "normality" will continue without returning to pre-crisis phenomena, such as full underwriting, advantage in excess of four times EBITDA, PIK-notes and covenant-light structures.

The main challenges for banks will be coping with the new regulatory environment that will be imposed upon them (in particular the capital adequacy ratios) and continued reimbursement of high-quality loans through refinancing the bond markets. Both phenomena might be compensating each other.

Lending terms are becoming somewhat less onerous in the Benelux region. Margins and fees have slightly decreased since lending terms for the banks in the wholesale market have become less expensive. Banks are also expected to write larger individual lending tickets. This process is still ongoing.

Initial public offerings are typically subject to soft underwriting and hence the announced wave of IPOs will not be required for bank capital. The financial markets are currently very liquid, thanks to the support of central banks, and this confers an attractive environment for equity interested investors.

Warren Hibbert, Partner, MVision

Sentiment among private equity investors in Q4 2009 has improved considerably from the depths the market experienced in the first half of 2009, to a positive-to-neutral outlook today.

However, despite the uptick in the public markets over the last four months of 2009, there is still some hesitancy amongst the private equity investor community. Many LPs have had to rebalance their private equity asset exposure in line with their predefined allocations, and/or they have had to rescue other asset classes that have fared far worse post-Lehman, before turning to new private equity commitments.

Nevertheless, there are LPs who are now actively mapping out their GP targets for 2010. We would therefore expect to see the consistent performers with stable teams and clear, relevant, operationally-driven strategies to attract real attention, potentially even being oversubscribed next year in a flight to quality by investors. But these funds will be the outliers in a year where a considerable number of GPs will try to, or have to, come back to market with complicated and unattractive stories.

The GPs that will succeed will be those that are able to avoid any unexpected surprises - be that valuation, returns, team, strategy or fundraising-related. This demands an open and completely transparent relationship with existing LPs - and this is no different in the Benelux region. No fund is perfect and LPs understand that, but even well-known brand name GPs can fall into the trap of sticking their heads in the sand in the vain hope that the market will not discover their imperfections. We have found the level of transparency and consistency amongst the leading GPs in Benelux to be of a very high quality that is appreciated by LPs and has led to successful fundraisings, and continues to do so even in today's market.

Dialogue, however, is a two-way street, and LPs need to exhibit the same levels of transparency and consistency that they demand. One of the dilemmas of 2009 has been to ascertain which LPs are genuinely able to commit fresh capital and what their respective timelines are.

A healthy, open dialogue between GP and LP enables GPs to accurately assess the parameters of their future fundraising. This can only enhance the level of certainty and general sentiment in the marketplace as far as funding is concerned, and that has positive implications for many other facets of our capital markets today.

Janet Brooks, Managing Director, Monument Group

LP sentiment towards GPs in any region of Europe should be considered in a global context. Issues resulting from the economic and financial crisis (namely the denominator effect and the huge levels of outstanding unfunded commitments, combined with the lack of distributions coming from their private equity programmes) caused many LPs to either stop making new commitments or dramatically reduce their commitments in 2009. While we anticipate some improvement in 2010, many LPs will still have lower allocations and will make fewer and smaller commitments.

Fundraising will continue to be challenging for the next year or more. GPs will need to show that they were disciplined in the hot markets of 2006 and 2007. They will need to show a portfolio that stuck to strategy, and from which they can produce positive performance. They need to show consistency of team going forward and greater alignment of interest with LPs. And they need to be able to garner a good level of backing from existing investors, in order to create momentum for their fundraise. However, European small and mid-sized buyout and growth capital funds are towards the top of the list of interest areas for many LPs, and may even benefit from a reduction of funds going into the mega-funds.

A major danger for GPs in relation to fundraising would be to ignore LP demands for greater transparency. Given the lack of recent or likely near-term exits for most GPs, it is on the potential of the unrealised portfolio - the current status, financing position, the GP's ongoing impact and ultimately the future prospects of each underlying company in a challenging corporate environment - that a large part of the investment thesis for a new or repeat commitment to a manager will be made.

Ultimately, however, the question today remains the same for LPs as it always has done: 'With what degree of confidence can we believe that this GP is likely to generate sufficiently strong risk-adjusted returns to justify a place in our portfolio?' GPs would be well-advised to hold off from fundraising until there is compelling recent proof in its portfolio to demonstrate this.

Carl Dotremont, Corporate partner, CMS DeBacker

The market for M&A and, to a lesser extent, the market for private equity deals, is likely to recover after a disastrous 2009. 2010 might well see considerable activity from venture capitalists and, for the first time in a while, some activity on the IPO market.

The general sentiment for the M&A market is that offer and demand are finally finding one another. Since the second half of 2009, the market has definitely become a buyers' market and will continue to be so throughout 2010 and beyond. The market for distressed M&A will continue to grow in 2010. It will be mainly industrial investors who will dominate this market. Regarding the market for private equity deals, a hesitant recovery can be expected in 2010. A lot of private equity investors have "cleaned up" their portfolio companies and, while some will have to continue to do so throughout 2010, a large portion will start focusing on new investments, albeit hindered by a lack of debt financing.

Indeed, the financial investors in particular will continue to be hindered by the conservative attitude of the banks in terms of leverage finance.

As is always the case during an economic crisis, new business models and new technologies are being developed, and that is certainly the case with social media and cleantech. While all successful enterprises have come to appreciate and integrate the Internet (in the broadest sense of the word) in their respective business models over the past decade, it is now up to social media to play their role and for the bulk of enterprises to discover the immense value of social media for their respective business models. Cleantech continues to enjoy a buzz because of growing awareness around climate change. So 2010 will most certainly see a lot of activity from venture capitalist in both the cleantech and the social media area.

Finally, with debt being expensive and likely to remain so, quite a lot of private companies will seek to raise money from the public through an IPO. The market is, however, still risk averse and while we might see considerable activity on this market, for the first time in almost three years, demand is likely to be more modest than what could be hoped for.

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