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 the 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 of portfolio companies than private equity firms do.

A staggering 97% of all UK banks surveyed and almost 94% of all British private equity houses canvassed stated that operative restructuring will be the task of the year. In terms of financial restructuring, the views differ considerably: while 95% of the banks in the country expect this to be the main focus of portfolio companies, only 68% of the private equity houses took that view. "One of the main reasons for this discrepancy might be the fact that it is easier for an investor to restructure operationally than financially as decisions can be taken internally and there is no need for negotiations with banks," says Dr Martina Ecker, managing director at Jefferies. Also significant was that buy and build investments and international expansions are still considered to be on the table with 59% of the private equity houses planning acquisitions and 25% of them looking at international expansion.

The survey interviewed more German than UK-based banks. This impact is pointed out by Dr Ecker, who conducted the survey: "German banks, more than British banks, do not see themselves as investors. And no bank wants to send companies into administration." Therefore, the first port of call would be a capital injection by the investor, which almost all interviewees expect if covenants are breached. Only then moratoriums on repayment come into play: 82% of all responding banks expect their industry to offer a moratorium on repayment and pay interest only. Only approximately every other private equity house is expecting this to be an option.

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.

In terms of sectors, those cited as attractive were healthcare, energy, alternative energy and environmental services, whereas auto, transportation and logistics are the least popular.

According to the survey, the impact of the recession will mainly be felt in spending, followed by employment. The majority of respondents based in the UK expect that a reduction of capital expenditures and the cutting of discretionary spending such as advertising - 88% and 82% respectively - will be the main recession-beating means. In third place, with 66% of the UK respondents, came the option of reducing staff at portfolio companies.

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