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Unquote
  • Industry

European sponsors sidestep panic, concede gloom over bank woes

Credit Suisse Headquarters building and UBS building to the left Paradeplatz Bahnhofstrasse Zurich
  • Harriet Matthews, Patrick Costello, Min Ho, Johannes Koch, Rachel Lewis, Christel Thunell, John West and Arezki Yaiche, with analytics by Jonathan Klonowski
  • 22 March 2023
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European sponsors are assessing the implications of Credit Suisse’s proposed takeover by UBS for the cost of capital, fundraising and dealmaking, with the situation expected to worsen an already gloomy outlook, private equity(PE) practitioners told Mergermarket.

A series of macroeconomic challenges have plagued the private equity market for more than a year, posing problems at every turn for sponsors’ core tasks of fundraising, deploying capital and realising returns. Following a steady decline in LBO activity since H2 2022, sponsor-backed buyouts in Q1 2023 to date are currently at their lowest level in a decade in terms of value, according to Dealogic data.

The situation is likely to put any short-term hopes for an improvement in the M&A market into “deep freeze” once more, according to a healthcare sector banker.

With the gap in buyer and seller valuation expectations already significant, yet more uncertainty will increase the bifurcation between “high-flying” companies and more mediocre peers, with the latter experiencing a harder time selling or raising capital, said one technology sector banker. The situation will also enhance the “flight to quality” for banks, advisers and assets, one France-based private equity partner said.

Sponsors are likely to shy away from launching exit processes for anything but their most outstanding companies in this environment, the same tech sector banker added. Ongoing processes attracting sponsor attention include France-based Groupe Premium, an Eurazeo-backed insurance broker that has piqued the interest of bidders including Bridgepoint and Cinven.

More deal postponements are therefore expected as sponsors reassess their plans, the same France-based PE partner and a Germany-based sponsor said. This environment is likely to see assets held for longer, with attention turned to inorganic growth. Mindful Capital Partners-backed Italian Frozen Food Holding has turned its focus to potential bolt-ons following an initial sale process attempt last year, as reported.

Motivated sellers are likely to continue to bring deals to market, however. According to the same tech sector banker, succession situations could still come to fruition, with entrepreneurs willing to put up with a 1-2x lower EBITDA multiple to avoid a delay to their retirement plans.

Don’t bank on it
While the situation has not had an immediate effect on financing costs, it has further damaged already fragile sentiment around private equity-backed M&A that needs finance backing, according to one investment banker.

Large-cap deals, in particular, will be in “wait and see” mode for at least a few weeks, the same France-based PE partner added.

Although not an option for everyone, sponsors who can proceed with their deals on an all-equity basis will be able to dodge tough financing markets in the short term, in hopes of refinancing at a later date, the technology sector banker noted.

Swiss deals are likely to have more exposure to problems caused directly by the potential UBS and Credit Suisse merger, given the possibility that they will have both lenders in their banking syndicates. Any winding down of these portfolios will leave a liquidity gap, said one Swiss debt adviser, with unanswered questions as to who could step in, particularly if a company needs to finance an add-on.

Fundraising mood music
Credit Suisse’s unstable situation also has certain implications for private equity fundraising, not least because the bank has a private capital advisory division. The value of these businesses often lies in their people and their relationships, rather than in assets, technology, or IP.

With the future of its investment banking division uncertain, questions remain over whether the relevant private capital advisory staff could leave, and how or if they will wrap up their live fundraising mandates, said one placement agent.

UBS is thought likely to “cherry-pick” the best Credit Suisse bankers for its investment banking practice, one UK-based, Europe-focused sponsor partner told Mergermarket. This will undoubtedly make any Credit Suisse bankers currently working with private equity highly motivated, he argued.

Nonetheless, fundraising prospects are unlikely to be directly affected to any significant degree, other than the fact that an uncertain macroeconomic environment makes raising capital a hard sell.

“I don’t think this has changed the mood music, just made it gloomier,” the same sponsor partner said.

Investors could now look elsewhere for their returns if interest rates continue to rise, however. “Broader than [the Credit Suisse situation] is the story that capital has a price again,” said another European sponsor. This means that investors have the option to generate returns through committing to other alternative asset classes beyond private equity, which could have an impact on appetite for PE, they added.

Credit Suisse’s collapse did not lead to senior partner convening an emergency meeting to assess exposure, the UK-based sponsor partner said. But he conceded he was putting feelers out today (21 March) to assess corporate and LP (limited partner) sentiment in the wake of the lender’s collapse.

Fundraising is unlikely to get any easier until dealmaking can proceed with more ease. The M&A market needs to be “unlocked” for LPs to see distributions from exits, one fundraising lawyer said.

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