Just 12 months ago, the large accounting networks were punting corporate finance work as the service line that would sustain the dramatic growth firms had enjoyed thanks to international financial reporting standards and Sarbanes-Oxley.
Since then those plans have gone out the window. Over the first half of 2007, deal activity remained buoyant, but the summer liquidity freeze has proved a major obstacle to transactions. Corporate finance teams are bunkering down rather than leading the revenue charge.
'I wouldn't hold my breath about things picking up soon,' says Ernst & Young private equity partner John Cole. 'People are looking around at deals, but it is just so difficult to obtain funding. Transaction numbers are down.'
Recent findings from the Centre for Management Buy-Out Research back this up. Figures for the fourth quarter of 2007 show that the UK private equity market dropped by 80%, plummeting from £15.4bn in Q3 to £2.9bn.
The major worry for firms is that the mid-market, where their corporate finance services are strongest, appears to have been the hardest hit.
There has been some degree of activity from large corporates with strong balance sheets, who have been able do deals. But large corporate work tends to go to investment banks, leaving accounting firms to pick up the scraps of the flailing mid-market. With buy-side and sell-side transactions suffering, the outlook does not look good.
'The credit crunch has clearly had a dramatic impact on bigger private equity deals in Q4, which has impacted the year's overall deal value and volume,' says Deloitte corporate finance partner Mark Pacitti.
Tom Lamb, Co-Head of Barclays Private Equity, says it could take 'several years' for the market to match the £35bn war chest raised over the last 24 months.
The best hope for corporate finance teams now lies outside the UK and western Europe. Markets in Turkey and the eastern Europe have remained busy through the credit storm.
Corporate financiers will have to cast their nets further afield if they are to overcome the problems crippling markets closer to home.
Private equity in Q4 2007
● Exit value is down by 24%from2006; there was a record total exit value in 2006 at £26.9bn compared to 2007 which is £20.5bn. The total number of exits in 2007 is the highest ever recorded at 355.
● Fundraising is down by 33% from 2006 at £15.2bn, after a record total of £20.2bn set in 2006.
● Public to private buyout slows in the fourth quarter at £1.4bn, in sharp contrast to the first nine months of 2007 at a record £18.1bn.
● Pricing and debt levels rise in 2007; EBIT multiples have again risen for buyouts over £100mand stand at 19.7 in 2007 and 16 in 2006.
● Debt to EBIT multiples are also high for larger buyouts with this ratio reaching 11.4 in 2007 compared to 9.1 in 2006.
● Only three of the top 30 deals (over £250m) have been completed in Q4,the largest being the public to private buyout of Monsoon at £755m in December.
● Deal flows lowed in Q4 with 75 buyouts to date after 153 inQ3.
● Receiverships up from70 in 2006 to 95 in 2007, the first rise since 2002.
● New entrants and alternative forms of funding providers, such as hedge and infrastructure funds are adding to the market competitiveness that are not affected by the credit crunch.
Source: CMBOR
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