Buyout outlook - 2009 already written off

We have at least another year to wait for any signs of a recovery, according to most buyout firms in Europe. Even the optimists only hold out hope for the second half of this year, according to a Jefferies 2009 European Buyout Survey, which canvassed 155 private equity institutions and banks that provide leveraged finance.

While most welcome the various European government rescue packages for banks and other measures to slow down recession, especially announced tax cuts and investments in infrastructure, two thirds of respondents believe that governments could and should do more to stabilise the economy. Overall, the majority don't expect to see signs of an economic recovery before the first half of 2010.

While private equity firms remain optimistic about the performance of their portfolio companies, the banks were far more pessimistic. Compared to half of private equity firms anticipating a maximum drop in profits of 10%, nine in ten banks believe that portfolio companies' earnings will fall by at least 10%, and almost one quarter are preparing for an earnings drop of at least 30%. Consequently, debt providers expect significantly more restructuring activities of portfolio companies than private equity firms do. Asked why there is such a huge gap in expectations, Warren Scott of Jefferies said: "While there might be an element of denial in the general sentiment of private equity firms, this more optimistic view has likely deteriorated in the last few weeks. Especially after having seen the abysmal trading results in the industrial sector in Germany in December, private equity firms' expectations would now be a bit closer to the far more pessimistic stance of lenders if we did this survey today."

If covenants are breached, respondents expect banks to offer a moratorium on repayment and pay interest only, or to reduce debt by selling assets. Less likely alternatives for financing institutions are debt-for-equity swaps or putting companies into insolvency.

Where deals are still possible, they will take very different shapes than previously, with debt comprising no more than 50% of any capital structure, corresponding to a multiple of three- to four-times EBITDA, maximum. Attractive sectors cited were healthcare, energy, alternative energy and environmental services, whereas auto, transportation and logistics are the least popular. For Germany, specifically, this is a mixed message: "Germany's backbone of industrial services should smoothe the overall fall, compared to the UK, which will undoubtedly be hit worst, but Germany does rely on its exports and thus the global economy's performance. Sector-wise, Germany can hope to compensate part of the deterioration in the automotive sector with its European leadership in cleantech, but for investors this is still a very small sector compared to automotive and they will compete strongly for the limited number of companies available", explains Warren Scott.

The impact of the recession will especially be felt in terms of employment: nine in ten German respondents view reducing staff at portfolio companies as a key recession-beating measure, compared to 63% of respondents based in the UK.

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• Topics
• Buyouts
• Industrials
• DACH
• Healthcare