The profession seems to have accepted that private equity deal activity, a
major contributor to sustained double-digit growth at the large accounting firms
last three years, is now almost certain to slow as the credit crunch starts to
An analysis of the top 100 private equity exits compiled by Ernst and Young
showed that in 2006 the average enterprise value of a private equity business in
Europe grew from $800m (£400m) to $1.5bn at exit.
Yet as the corporate financiers look towards 2008, the good times of a year
ago seem a long way off.
The sub-prime credit crunch has meant that debt financing, and the associated
financial engineering and tax benefits that go with it, will become increasingly
expensive and difficult to secure.
Ernst & Young global private equity head Simon Perry said private equity
‘was facing a tougher environment with the recent squeeze on credit undoubtedly
putting pressure on the financing of deals’ and warned the industry would have
to work hard on ‘alternative exit routes alongside secondary sales’.
Credit rating agency Standard & Poor’s has predicted that European
dealmakers are going to be far more cautious following the credit freeze, which
set in towards the end of August.
‘The leveraged finance market is in a holding position right now as market
participants wait to see how the first transactions brought to market after the
liquidity crunch will fare,’ said Standard & Poor’s leveraged finance expert
So is this the end of the private equity heyday? Will losing the advantages
offered by leverage and caution of lenders damage the industry’s progress?
Perry, although cautious, said the private equity model was now so
established that despite recent obstacles it would continue to succeed.
‘Market participants view this as a short-term dip in activity prior to
returning to a more rational climate in 2008. There is widespread solid belief i
n the PE model and the long-term fundamentals remain strong,’ Perry said.
The buy-out houses, and their advisers at accounting firms, will hope he is
right. The boom times may be over, but even slower deal activity would still be
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