Pension deficits putting off private equity

The pension deficit woes facing UK plc have started to spread beyond the
public realm, with private equity investors also beginning to shy away from
acquisition targets with hefty pension liabilities.

A survey by mid-tier accounting firm Grant Thornton found that over the last
year only 37% of the private equity groups questioned had completed deals
involving companies with defined benefit deficits.

This marked a substantial drop on the previous year when every private equity
group polled had completed at least one deal with a company carrying pension

The growing wariness of private equity towards companies with defined benefit
deficits has been put down to the fact that buy-out firms typically take a
short-term view on businesses, and do not see a three to five year time frame as
long enough to deal with a large pension liability.

Mat Bhagrath, a corporate finance partner at Grant Thornton, said the
introduction of the risk based levy for the pension protection fund was another
factor scaring off private equity and venture capital groups.

‘It appears that VCs are increasingly looking for acquisition targets without
the hassle of pension shortfalls, or looking to divest, where possible, of those
companies in their portfolio with a pension liability,’ Bhagrath said

Grant Thornton found that most of the private equity groups (60%) that
already had companies with pension shortfalls in their port-folio would alter
the benefit or contribution structure of troublesome schemes.

Almost a fifth of the groups (17%) claimed that they would make a one-off
financial contribution. Other respondents said that they would seek insurance,
or sell off the company with the deficit.

The concerns around pension deficits by private equity follow wider anxiety
around the impact the pensions regulator is having on the mergers and
acquisitions market.

The PPF levy, which the regulator introduced, is payable for the year
commencing 6 April 2006 and places a strain on company cash flows and resources.

This, however, is just one of the effects pension issues are having on deals.
There are further concerns that as an unsecured creditor in a company, a pension
fund is becoming as important as buyers and sellers when thrashing out a deal.

Pension fund trustees are now also involved in negotiations, and businesses
have to gain their approval on deal structures.

This slows down the time it takes to close off a transaction and also reduces
flexibility as a third party has to be accommodated in negotiations.


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