Fitch Ratings reports on recycled deals dominating the private equity landscape in 2004

10 June 2004

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In a report entitled: 'Recycling Activity Continues to Dominate European LBO Exits', Fitch Ratings notes that secondary buyout and recapitalisation transactions (together known as 'recycled' transactions) represented 43.4% of total LBO issuance rated by Fitch in Q1 2004. The international rating agency outlined that private equity investors seeking divestment from European leveraged buyout transactions in 2004 will continue to pursue the principal exit strategy adopted in 2003: a recapitalisation or a sale to another private equity firm.

In the report, Fitch argues that the IPO exit route has not been particularly successful for European LBO issuers. While the market conditions for IPO issuance are currently more favourable than they have been for the last three to four years, and a number of Fitch-rated issuers have been contemplating IPOs, to date, there is still plenty of speculation but little execution. The trade sale exit route has proved to be more successful for Fitch-rated LBO issuers, with recent examples including the sale of Messer Griesheim's US, UK and German industrial gases business to Air Liquide, the sale of BSN Glasspack to Owen-Illinois and the divestiture of Oxoid to Fisher Scientific.

The rating agency concluded that recycled transactions remain the dominant exit route for private equity firms and that the popularity of recycling activity is a reflection of high levels of un-invested cash in the private equity sector. Fitch added that the market conditions are such that a lower equity contribution is accepted in recycled transactions, thereby facilitating a potentially enhanced internal rate of return for the private equity firms. Moreover, such transactions are quicker, easier and cheaper to arrange compared to flotations, and offer far less execution risk for the private equity firms.