Encouraging news

Clock ticks for PE funds
By James Harris on January 21 2010, M&A Deals.co.uk

Private equity firms are under pressure to invest, according to research by accountancy firm Grant Thornton.

A study of 100 private equity executives has found that the majority of respondents (80 per cent) indicated that they needed to invest at least 25 per cent of their latest fund, while 27 per cent said that they had to invest more than three quarters of their fund.

Mo Merali, head of private equity at Grant Thornton, says: 'Private equity sponsors are very keen to complete new deals as they need to invest the majority of their existing funds before they can raise any new funds and there have been few attractive assets on the market lately.'

The research indicated that 71 per cent of respondents expected to see an increase in the volume of new investments over the coming 12 months, while 4 per cent anticipate a decrease in activity.

The uptick in investment activity coincides with a perceived improvement in debt markets. Just over half (51 per cent) said that difficulty in raising debt would be an obstacle to dealmaking, compared with 81 per cent blaming unrealistic vendor pricing and 66 per cent pointing the finger at the lack of quality businesses for investment.

Most respondents (81 per cent) intended to invest in buy-outs, while 58 per cent also expected to take minority stakes in businesses, and 27 per cent said that they would invest in distressed assets.

'There are a number of reasons why it is unlikely that many buyout firms will shift their focus to taking minority stakes in so-called expansion deals – many buyout funds have not got the skill set for growth capital, while others manage funds that have terms and conditions which would not permit them to focus on investing in minority stakes,' says Merali.

The research also shows that there is a noticeable shift in attitudes. In the last quarter of 2009, two thirds (66 per cent) of respondents said that they expected some of their portfolio companies to breach loan covenants. In the third quarter, 81 per cent expected some of their companies to breach conditions in their loan agreements.