Oliver Smiddy, of Financial News, files this dispatch on how the financial crisis is being felt in the private-equity world. Financial News is a Dow Jones publication and a contributor to Deal Journal.
The financial crisis will be longer and deeper than even the most bearish members of the securities industry have been predicting, according to preliminary results from the third annual survey of the European buyout industry by Private Equity News. The survey shows that one quarter of buyout firms are thinking of layoffs while nearly half think the effects of the credit crisis would be felt for years or would change the industry forever. Another 53% say the downturn would last one to three years.
Respondents in the last two annual surveys by Private Equity News, a Dow Jones publication, foreshadowed the downturn, though they underestimated its severity. More than 200 executives in the private-equity industry have responded to the survey, which will close next month and be published in February.
In last year’s survey, just 5% of respondents said the effects would be felt for years, nearly 24% said it would be a temporary downturn corrected relatively rapidly, and 62% thought it would just result in damped activity.
Three quarters of people in this year’s survey, which is sponsored by Simmons & Simmons, said they expected consolidation of the private-equity industry, with 75% saying it would occur because firms were unable to raise new funds and a quarter saying it would happen through merger activity.
Arthur Stewart, a partner at Simmons & Simmons, said: “The private-equity industry called the downturn, but few expected it to be as severe and prolonged as it is proving to be. We’re now living with a crisis that may see some less successful firms unable to raise new capital and a tough deal-making environment that will see some firms struggle to put capital to work.”
Neil MacDougall, managing partner at U.K. mid-market buyout firm Silverfleet Capital, said: “We were well aware of the risk of putting substantial financial leverage on top of operational leverage and as a consequence chose to avoid a number of highly leveraged – in every sense of the word – investments in both 2007 and 2008. However, in retrospect, the downside modeling on some of our investments was probably too timid.”
Firms plan to do more follow-on investments to restore or reset financial covenants and bolt-on deals. More than a third of respondents said they would make more investments in public companies, and aim to do more public to private deals.
Buyouts were likely to decrease, with 80% saying they would do fewer large buyouts of more than €1bn ($1.3m), and 40% reducing the number of mid-market deals.