Looking Ahead: the players' predictions for 2008

01 January 2008

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Javier Loizaga

Mercapital

"In the aftermath of the credit crunch, the question is how long the LBO debt market will take to recover: there is still uncertainty in the air. In Spain, we are not facing a recession, but it is undeniable that we will experience a significant economic slowdown in 2008 and this adds to the current market ambiguity.

"Sellers are not yet adapting to the new pricing reality, while European private equity managers have not ceased to fund raise. If the tightening in the markets lasts much longer, it is possible that we will see firms with a large capital overhang. Of course, liquidity - and consequently deals - is coming back, albeit at a sluggish pace.

"Additionally, the latest developments will certainly change the way GPs create value in their portfolio companies. This year, we have turned down opportunities to invest since the prices were too high, but have made a couple of exits this year for valuations that would be hard to get these days (namely the SBO of healthcare provider USP Hospitales to Cinven last summer). I could say that we saw the crisis coming and rushed to sell, but this was not the case. You cannot time a cycle and this is part of the game, but sometimes time is on your side."

Jaime Hernandez Soto

MCH Private Equity

"It is going to be increasingly difficult to make good returns solely based on leverage re-engineering, as we saw it happen in a few large transactions. Some banks that used to wholly underwrite the debt and syndicate it later are no longer willing to do it and are requesting the financial sponsors to get actively involved in the structuring of club deals. However, well-structured transactions are being financed with no major setbacks.

"In football terms, the industry got a yellow card this time, but not that terrible red card it received at the beginning of the 90s. From a 15-20 year perspective, interest rates are still low and the underline balance sheets of many Spanish companies are healthier than ever. From time to time, it is good to get back to basics."

Armando D'Amico Acanthus Advisers

"Fundraising: As a consequence of the credit crunch we have already seen a slow down in investment and exit pace. We therefore expect a lengthening of fundraising cycles with funds coming back to market at a more normal rate as opposed to, in the words of one LP, 'a mad rush to close funds when conditions were easy'. Mega funds will feel this impact the most, while, according to our research, we expect mid-market fundraising to remain robust, with only a marginal decline. The spotlight will be on markets where private equity is riding changes in the fundamentals, for example in Eastern Europe, where fundraising has doubled in each of the past two years, with some EUR4.5bn expected in 2007.

"LP appetite: We have identified two trends we expect to continue. One is the increasing demand for the European mid-market (defined here as funds of EUR100m to EUR1bn in size). We continue to see more LPs with mandates targeting this segment, and have tracked in 2007 record numbers of US LPs opening offices in Europe or appointing advisers with more focused mandates. The other clear trend is an increasing appetite for special situations funds - we expect this market to expand and more LPs to commit to it.

"Alignment of interests between LPs and GPs: This issue has taken centre stage in recent years. Our 2007 survey of LP/GP relations indicated that both parties overestimated the quality of their communications and highlighted fund terms as the biggest area of friction, as the abundance of capital encouraged some GPs to be less concerned with maintaining good relationships with their LPs. As one LP put it, 'the overheated fundraising cycle is allowing funds to relax on transparency and corporate governance'. However, what goes around comes around. We expect some of the power to shift back towards LPs after the warning shot of the credit market turmoil.

"So what will 2008 bring? As these trends unfold we will begin to see the answers but, in the main, we at Acanthus expect a more challenging fundraising environment - not because LP appetite for private equity will decline, but because LPs will be more selective. After all, the private equity firms capable of outperforming will always be a scarce resource."