CORPORATE FINANCE - John Breach

The cost of debt finance has hit a long-term low. We have cheap debt funding promising to allow more leverage – surely a venture capitalist’s dream?

But against the backdrop of the latest statistics from the Centre for Management Buyout Research – which point to a decline of over 50% in private equity activity compared to the same period in 2000 – it would appear that the investment community is not taking advantage of the current conditions. So when will the mists clear to allow private equity investors to make confident investment decisions?

The economic backdrop seems to be implying the emergence of tentative growth. Only this week Mervyn King, deputy governor of the Bank of England, said that chances of UK recession are ‘still very small.’

The latest BDO Business Trends Report shows that the BDO output index slipped marginally in the third quarter of 2001, implying annualised economic growth of 1.7% in the first quarter next year.

The BDO optimism index, despite having fallen for two years, is still implying economic growth in 2002. The report suggests that, given projected core inflation of 1.4% in Q3 2002, there is room for a further 0.25% cut in interest rates. Monetary policy is aggressively spurring consumer demand.

This should give the banks’ credit committees a degree of optimism particularly in relation to consumer related businesses, and if cheap debt becomes available then the risk money will follow.

Anecdotally, both our private equity and M&A teams have seen a significant jump in new deal activity in the last few weeks. We put this down to the fact that vendors’ price expectations are lowering, in line with the equity markets, to realistic levels, while liquidity remains strong, as private equity houses are keen to get investing again rather than sit on their funds.

So can private equity investors now make confident investments? The answer is, that whilst the IPO market remains in a state of shocked volatility, and many public and private companies are in sell mode, now must be the time to invest. Providers of debt and equity should have confidence in their convictions, believe the economic indicators and ignore the recessionists in the press. If they do they will find some interesting opportunities.