All-equity deals on the rise in 2010

Gail Mwamba
25 June 2010

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The proportion of all-equity deals being executed by private equity players is on the rise once again, as the debt-underwriting markets continue to lag behind a revival in deal activity, forcing investors to fully back deals to meet vendor deadlines.

According to unquote" data, the number of UK deals in excess of £10m, without any debt component, executed in the second quarter of 2010 has increased to 45% of all deals, the highest rate in a year. This figure is in stark contrast to that recorded in the first quarter of 2007, when only about 5% of the deals were executed without debt.

According to Ian Sale, managing director at Lloyds TSB Corporate Markets Acquisition Finance in London, all equity transactions are mainly taking place among larger deals, which would require more than one bank to back the debt. With underwriting, which enables banks to sell-on debt, having slowed to a trickle, private equity investors are struggling to prepare banking syndicates in time to meet vendor deadlines.

"The reason for this is not due to a lack of debt but is usually down to timings, to either enable sponsors to meet purchase deadlines or to provide a knock-out bid to beat the competition," says Sale. "Some private equity investors are not able to get a group of banks together quickly enough to meet the vendor deadline."

As such, private equity investors are either having to get bank alliances ready in advance, or rollover existing debt. A good number have resorted to backing the deals with all equity, and then work to get the club of banks on board after the deal has been finalised. For example, Bridgepoint's purchase of HobbyCraft, where no leverage was used in the initial deal but the investor plans to introduce a debt structure at a later date.

However, some underwriting has been seen in the market - one of the most significant being the $615m debt package used to back the $1.4bn buyout of UK Aircraft leasing company, Avolon. Banks are also understood to be working on an underwritten debt deal to finance the buyout of the RBS online payment business, WorldPay, which is expected to sell for about £2.5bn.

"The situation is improving, particularly if you compare things to a year or 18 months ago when there was nothing happening in the underwriting market at all," notes Sale. "But we are still not back to where we were about two to three years ago."

It remains to be seen whether recent underwriting activity will be sufficient to bring down the number of deals closed without debt. In the mean time, it appears private equity houses will have to continue to put up significant stacks of cash to be able to close deals on deadline.