Public markets private equity

Corporates remain positive about the influence of private equity on debt and equity markets according to a report by law firm DLA Piper. Top of the list is the access to capital that private equity firms can provide, followed by private equity's ability to influence market valuations and its influence on the involvement and engagement of investors.

Indeed, private equity firms will look to take advantage of fluctuating stocks and put capital to work de-listing assets, according to Alex Tamlyn, head of capital markets at DLA Piper. "Overall market levels are quite good even against the backdrop of the credit squeeze - but individual stocks are volatile - stock dips can represent undervalue situations, and private equity firms are always on the lookout for undervalue situations." However, he warns that private equity firms will have to act quickly to take advantage of undervalued stocks given the uncertainty in the market. "The key is the ability to respond quickly because the window of opportunity in the case of any given stock may be quite short," he says.

Although the uncertainty in the market may present opportunities for private equity firms, it has also restricted the options for private equity firms looking to realise value. "The IPO market is extremely flat at the moment, which means that, as a general rule, in the short term it is unlikely to be a viable exit option," Tamlyn says. However, he qualifies this by pointing out that the market is not closed across the board and "there is still room for entrants with a strong equity story". Because the nature of the public market slump is not due to cash shortages in the system, Tamlyn believes conditions are likely to change sooner rather than later. "The current downturn has arisen as a result of nervousness about the markets, not shortage of institutional money to invest - it is unlikely to be a long term phenomenon and there is light at the end of the tunnel," he says.

The potential for private equity firms to take advantage of the downturn via a PIPE deal (private investment in a public entity) has been raised recently in some quarters. With some corporates unable to access financial markets for the level of funding they require, PIPE deals could provide private equity firms with an access route to a listed company at a discount. However, Tamlyn cautions that outside the US PIPE structures are less advanced, do not afford a private investor any extra flexibility and cannot be easily utilised by a private equity house looking to gain an angle on a deal.

"In the US, PIPES have developed into a specific product line - they are much more open to customisation than a registered offering, being flexible in terms of timing of issuance of the relevant shares and in terms of the speed of the overall process. Within EMEA and in particular the UK PIPES are less popular because the legal and regulatory environment makes no concession to them as a special variety of deal - in these jurisdictions the private equity investor is in the same position as any other investor and so the scope for taking a specially advantageous position is very limited."

- Late last year a number of IPOs were pulled in the wake of weak market conditions. TA Associates decided not to list IT security company Sophos on the London Stock Exchange, Terra Firma pulled back on the listing of renewable energy company Infinis and Phoenix Equity Partners scrapped its plan IPO of Gaucho Grill, opting for a sale to ICG. Elsewhere in Europe, Sweden's Ratos cancelled its planned listing of Bisnode in November 2007.

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