Global Buyout Activity at 4 Year Low

With the credit markets as barren as a lunar landscape at the moment, the buyout markets (particularly on the large scale) have slowed. Year-to-date thus far, global buyout activity has plunged 74% compared to last year to a four-year low of $180 billion.

Deal volume has decreased most sharply in the United States, with an 83.5% decline year-to-date to $61.8 billion. Volume in Europe fell 61% to $70.7 billion and in Asia deals fell 25% to $18.8 billion. The rest of the world totaled $29.8 billion.

Even with these down figures, those that say that buyouts are a thing of the past though are seriously delusional. Smaller deals are getting done and financing has gotten more creative as many have put the current cap of debt financing for a deal at $2 billion. Once the debt markets pick up again (and they will!) the large deals will return just as they did when things sorted themselves out after the junk bond market collapse two decades ago. Private Equity firms won’t sit on the sidelines forever.

Private Equity Firms Raised Record Funds in First Half of 2008

Despite down dealflows and chaos in the banking systems, Private Equity remains an incredibly attractive asset class to invest in.  A record $324.4 billion was raised by Private Equity firms in the first half of this year with investments in distressed assets funds leading the uptick with a 28% rise to $33 billion. This follows up a recent survey by Preqin in which a third of investors surveyed said they were shifting money to distressed funds from buyouts.

Moulton Predicts Bankruptcies of Private Equity-Backed Companies in UK Will Rise

Jon Moulton, of Alchemy Partners fame, believes that between 50 and 200 Private Equity-backed companies in the UK are in danger of not being able to meet their banking covenants by this Christmas.

Obviously this prediction is targeted at those firms that were acquired using extreme leverage ratios during the two year plus credit boom preceding the crunch that began in August of 2007. A downturn will make it tough to cover interest payments using operating profit when you’re geared at 90%. It doesn’t take much clarevoyance to see that wave coming.

A study of the 124 largest buyouts from the 1980’s by Steven Kaplan and Jeremy Stein showed a default rate of 2% on buyouts organized prior to 1985, and a default rate of around 27% on buyouts organized in the second half of the decade which was when the high-yield bond market was at its most prominent. It will be very interesting to see how the 2000’s break down. Perhaps a shorter period of high default rate, but with higher rates of default? Time will tell.

The 25 Most Powerful Women in Banking

U.S. Banker has just released it’s list of the top honeys in money (ok, maybe that term’s not helping the cause).

Lessons For Today’s Bankers from 1863

Simple, sound advice often stands the tests of time.  Financial history is full of such examples.  The following has been sourced from Daring Opinion by Elie Elhadj.

In December 1863, Hugh McCulloch, then newly appointed U.S. Comptroller of the Currency and later the U.S. Secretary of the Treasury, wrote a letter to American banking institutions. Here are some excerpted highlights:

• Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to encourage speculation. Give facilities only to legitimate and prudent transactions.

• Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank.

• If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it. If you have reasons to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you.

• Pay your officers such salaries as will enable them to live comfortably and respectably without stealing; and require of them their entire services. If an officer lives beyond his income, dismiss him; even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. Extravagance, if not a crime, very naturally leads to crime.

• The capital of a bank should be reality, not a fiction; and it should be owned by those who have money to lend, and not by borrowers.

• Pursue a straightforward, upright, legitimate banking business. ‘Splendid financing’ is not legitimate banking, and ‘splendid financiers’ in banking are generally either humbugs or rascals.

Well said.

Atos Origin Rejects Candover Offer

For Erwan: French IT service provider Atos Origin has rejected a €1.6B takeover approach by Candover for its Atos Worldwide unit, which specialises in electronic payment systems.

Since the offered was received, Centaurus Capital has halved its stake in Atos and now controls a combined 16.71% interest along with fellow hedge fund Pardus. Meanwhile PAI Partners has upped its stake to 22.61% and has become the company’s largest individual shareholder. PAI was the founding shareholder of Atos when the company was created through the merger of Axime and Sligos, with the investor holding 100% of the company until its listing. The private equity firm also oversaw Atos’ merger with Origin in October 2000.

PwC Report Shows Private Equity Interest in Logistics and Transportation

PwC has just released a study that shows private equity firms are looking to target companies in transport, distribution and logistics for acquisition.  The business service sector as a whole is going against the down market grain with deal flow numbers increasing.  In any downturn corporations begin to divest their non-core assets following strategy shifts and the restructurings they’re sure to bring. With this in mind 2009 should be an excellent vintage for those with the ability to be buyers, which is just what private equity funds are positioned to be.

Guy Hands Predicts Private Equity Dealmakers’ Pay May Drop by 75%

Guy Hands of Terra Firma predicts that compensation for private equity professionals may drop by up to 75% due to effects from the credit crunch as firms take longer to invest their funds. Hands’ prediction is based on an assumption that private equity firms will own the assets they buy for an average of eight years, twice as long as before. Hands is also expecting firms to take longer to invest the funds they raise, perhaps up to four years as compared to a two year average that many large firms had reached before the credit crunch.

75% seems like an excessively high number especially when compared to how compensation faired in other down cycles for private equity (such as when the junk bond market fell apart).  That being said there is likely to be some negative movement until things pick up again.  What a great time to be graduating!

Private Equity Allowed Bigger Stake In Banks

In all the commotion and hullabaloo surrounding the events effecting the financial world these past few weeks, little attention has been paid to the Federal Reserve relaxing rules concerning minority ownership of banks by Private Equity investors and other investment groups, allowing them to own up to 33% of a bank’s equity, including 15% of the voting shares.

Thus far banks have had to raise more than $350B thanks to write-downs in excess of half a trillion dollars, and the need for further infusions of capital is certain. With these lowered restrictions Private Equity firms could provide much needed additional funding. Look for Private Equity firms to invest in small and medium sized banks as funds won’t wish to put all their eggs in one large bank basket, especially after witnessing the difficulties that TPG has experienced with WaMu.

Moving the ceiling up to 33% is a step in the right direction, but it’s not enough to make PE a viable source of rescue.

• New Federal Reserve Regulations Concerning Private Equity Investment in Banks

Jean de Courcel Appointed as Senior Advisor to Hawkpoint

Quick alumni news: Jean de Courcel (H.76) has been named as a senior adviser to leading European Private Equity boutique advisor, Hawkpoint. Congrats!