2007: A year to remember

The statistics on pages 20-21 show what we all know, that 2007 was an exceptional year. Whether one looks at buyouts in the over EUR150m, under EUR150m or early-stage bracket, both the number of deals and the value of deals are at exceptional levels. Perhaps not surprisingly, in the sub-EUR150m category activity prior to the millennium was higher and values comparable, while in the early-stage group activity and value are substantially lower than in 2000. But the major distinguishing feature of the statistics for 2007 is the value of deals above EUR150m at just on double 2006 and two-and-a-half times the peak of 2000.

However, the statistics for the year disguise the slowdown in activity in the second half of the year and the stalling of the secondary market in the last quarter. A chastened western world peers out to 2008 from under a mushroom cloud of increasing bank write-offs, credit card debt, plummeting CDO issuance, further concerns about SIV liquidity based on the medium term note market, plunging sterling and credit default swaps (quite why the world needs $45trn of these things that so few properly understand, beats us). Any bubble leads to misdirected investment and the bigger the bubble, the longer it takes to redirect investment towards worthwhile projects.

Against this background, the private equity community faces a period of exceptional opportunity. Gone are the pressures to invest at inflated values; gone the need to spend hours haggling with the bankers to see how 'lite' the 'covs' can be got; gone the need to rely on bankers to do the syndication. The private equity community can now rest its financing prowess and return to its core skills of spotting opportunities and restructuring companies and industries. Enter dead on queue the gun slinging Guy Hands heading off to the OK Coral for a shoot-out with Robbie Williams and Mick Jagger. Surely, this brave approach shows the way forward for the private equity industry over the next few years.

While 2007 will be remembered as an exceptional year, the investing side of private equity will breathe a sigh of relief as they return to calmer waters that are likely to throw up a multitude of attractive new opportunities in which to invest the considerable funds currently at their disposal.

Larger buyouts (>EUR150m) for the year show a record value of EUR61bn, 85% above last year's record breaking level, while the number of deals is broadly the same at 54 as compared with 53 in 2006. At these levels, 2007 was running at two-and-a-half times the peak values achieved around the millennium with an increase of 35% in the number of deals. In the light of the tightened credit markets, a significant fall in both the number and value of deals is inevitable at the top end of the market.

Smaller buyouts (

Early-stage and expansion capital deals at just on EUR5bn of value were 87% up on 2006 and at 258 deals were 25% up in terms of numbers of deals. This probably reflects the gradual recovery in this market following the ravages of the post dotcom era, but both values and number of deals remain way below the exceptional levels achieved around the millennium. It is much to be hoped that the recovery in this vital market is not too badly damaged by the fallout from the credit crunch.

As to the survey of future predictions, at the last quarter we saw a strong swing to an expectation of a decrease in the number of buyouts over EUR50m, lower gearing and lower entry multiples. This swing is reinforced in the latest survey with the percentage expecting a decrease in activity in the upper end of the market increased from 79% to 86%, and 98% now expecting a reduction in gearing levels and 86% a reduction in entry multiples.

However, perhaps of greater note is a marked increase in pessimism with respect to the smaller end of the market, under EUR150m, where the percentage expecting a decrease in activity has risen from 14% to 40% and the early-stage where the percentage has grown from 10% to 30%.

So the pessimism apparent at the end of the third quarter with respect to the top end of the market has now clearly spread to the smaller end, albeit to a lesser extent. But let it not be forgotten that any bubble brings opportunities for those who are fleet of foot.

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