SCM predicts hard time for exits in 2008

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When credit was easy, recapitalisations provided GPs with a quick and profitable exit route. With liquidity in the debt markets now significantly tighter, distributions from leveraged recaps will slow significantly, with large buyout houses the worst affected according to an exit study from SCM Strategic Capital Management, a Zurich-based private equity, real estate and infrastructure adviser.

In 2006 recaps accounted for 33% of exits in 2006 in comparison to 30% in 2005 according to the study, with this upward trend continuing in 2007 until the credit crunch. Realisations in 2007 are likely to be in line with those of 2006, according to the study, yet this is in large part due to a strong H1 which compensated for the credit-crunch hit downturn of H2. Exit amounts in total in H1 2007 were 35% up on the same period last year.

Although 2008 will be a testing year for private equity, it is important to bear in mind that the difficulties in 2007 were liquidity not credit related. "We have had very few defaults and the credit quality of companies and issuers has not declined and was not the trigger for the decline in liquidity. This is one positive from H2 2007," said Stefan Hepp at SCM. However, Hepp acknowledged that we will witness a slowdown in 2008 and central bank policies of interest rate cuts will be of little help in restoring confidence. "The big problem is the spread. If you have a spread of 500 basis points and you cut the base rate by 0.5% this is not going to move the needle," he said.