Squeeze those suppliers

07 April 2008

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With the new capital gains tax (CGT) regime upon us, a clearer picture should emerge of the mismatch between vendor and buyer price expectations. It has been suggested that the CGT changes have given a false picture of deal flow, especially in the lower mid-market, as sponsors look to push through sales and avoid the extra 8% on capital gains. With many vendors still clinging to pre-credit squeeze valuations, we will likely see fewer deals in the coming months as GPs struggle to convince sellers of changed market dynamics

The quarterly look at market sentiment in this issue reveals a market pessimistic about deal flow. A majority believe there will be fewer opportunities in all deal spaces, although a large proportion expects the lower mid-market to be better insulated.

The UK Watch also reveals everyone on the same page in theory regarding declining entry multiples. It will be interesting to see whether private equity as seller has made the same adjustment to the new marketplace that private equity as buyer no doubt has.

Distressed and turnaround players have seen fewer deals than they might have expected nine months into the liquidity troubles. A distressed player confirms: "the timeframe for these opportunities to appear does keep getting pushed back. It may be early 2009 before they materialise. We would have expected to see more by now." The operational abilities of private equity firms will have a significant bearing on the amount of distressed opportunities available to private equity. Kohlberg Kravis Roberts provided a recent good example of how to squeeze value in an over-leveraged portfolio company. A couple of weeks ago it informed Alliance Boots suppliers that from 1 April it is to extend its payment terms to 75 days from the end of an invoice as well as introduce a settlement charge of 2.5% - effectively charging suppliers for the privilege of having Alliance Boots on its books. Expect similarly ruthless moves from other private equity firms battling to service debt and avoid covenant breaches in portfolio companies.

Yours sincerely,

Nathan Williams

Editor, unquote"

Tel: +44 20 7004 7449

nathan.williams@incisivemedia.com.