For firms unable to arrange debt funding, or which would rather not overload businesses with borrowing, there have been two choices: hang back from deals or use their own funding. At London-based Alchemy Partners, one of the two acquisitions completed last year—a €62m bid for Geo Networks, a UK-based optical-fibre network owner—was funded entirely through its own capital, with no third-party debt. For finance director John Rowland, a lack of debt is “no bad thing” for private equity if it prevents companies from over-extending themselves. “There’s nothing wrong with a levered business as long as you’re not over-levered,” he says. “The problem [in 2006 and 2007] was that sometimes the banks were offering more than they should have done, and it takes a lot of discipline from the investment committee to take less when it’s being offered.”
Even more worrying than banks refusing to back deals is the threat of investors in private equity funds themselves having to back out of commitments. In general, the management fees that institutional investors pay private equity firms give industry CFOs a degree of revenue visibility their peers in other industries can only dream of. “If I were a CFO of an industry company today, I think it would be extremely difficult to have one business plan for 2009,” says Christophe Florin, CFO of Paris-based AXA Private Equity. “In our business we don’t have that [problem].”
But a different problem arises when institutional investors no longer have the cash to honour capital they’ve promised to back deals. High-profile cases include the UK’s Candover Investments, which invests in funds owned by a private equity subsidiary, Candover. Now struggling with liquidity problems, Candover Investments said in March that it will not be able to meet a €1 billion commitment to Candover. Speculation is now mounting that Candover will not survive as a private equity house.
A prime concern for private equity players is that other investors could default on their committed capital. As Evershed’s Spinner notes, private equity firms could legally take their existing investments away from investors that default. But, he adds, few firms will be brave enough to take such action given that they might scare off future investors. “I expect that [would signal] the death knell for future fundraising activity.” Instead, private equity firms want to remain as close to their investors as they can, monitoring their financial position as vigilantly as they would their own portfolio investments. “Right now you really need to be close to your investors and understand where they are,” says GMT’s Long. “If you send a call notice, how will it be accepted?”
Where Did All the Buyouts Go?
With few houses deciding to bankroll investments on their own, a lack of funding has inevitably reduced the number of deals. In 2008 the continental European buyout market reached a seven-year low, with €44 billion of buyouts completed, compared with €108 billion in 2007. (See “Bye-bye buyouts” at the end of this article.) “When you are not sure, you don’t invest,” says AXA Private Equity’s Florin of the economic uncertainty hampering the flow of deals.