Counting the cost

Raising debt has become nearly impossible and private equity houses are subsequently struggling to finance (or refinance) deals, leaving them with limited options to generate returns - particularly with the value of incumbent investments on a downward slide. One of the tangible effects of this is that almost half of all private equity-backed UK companies will make significant staff cuts in the next 12 months, according to a recent survey by business advisory firm Grant Thornton (see chart).

"Because of the current climate, private equity firms are looking to be smarter - in terms of internal efficiencies, bolt-on acquisitions, operational improvements, and cash management. They are keen to show a genuine performance improvement in their portfolio companies, by focusing on the cost-base of their businesses," says David Ascott, private equity partner at Grant Thornton.

With private equity funds looking ever more at how value is generated and preserved in portfolio companies, costs are becoming increasingly prioritised. "Private equity firms can't ignore reviewing their head count when it comes to cutting costs, but equally they are not going to be mindless, especially when the value of the business comes from the people involved. It would be a fairly blunt instrument to pick solely on jobs," Ascott continues.

He even suggests that reviewing staff levels should be a last resort, and that there are a number of ways to preserve cash, such as outsourcing activities.

Dry pipeline

With exit opportunities on the decline, it is now also time for GPs to get creative in order to make profitable new investments. Some are launching new funds specialising in distressed investments, while others are looking to diversify their investment team. Whatever the case may be, Ascott believes that deal flow will not recover substantially until early 2010. "Despite more attractive prices for buyers, the fact is that there aren't that many businesses on the market right now in which to invest," he says.

Indeed, the volume of private equity transactions in the UK for the first quarter of this year fell 60% from Q1 2008, while the total value fell a staggering 98%, according to unquote"s proprietary database Private Equity Insight.

And when looking at the data compiled in the survey, it seems that numbers will continue to fall over the next year, as 43% of respondents plan to invest less than a quarter of their funds this year, while 82% have admitted that the current economic climate has delayed the planned sale of their portfolio companies.

Portfolio management it seems will therefore be the primary objective in 2009, and the process is likely to be a gruelling one in terms of trimming down costs and refinancing. But it is the performance of portfolio companies that will inevitably determine whether private equity firms will emerge from this year's turmoil as victors or losers.

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