Up to 40% of buy-out groups could fail
By Lina Saigol, M&A Editor
Published: December 19 2008 23:30 | Last updated: December 19 2008 23:30
The deepening economic crisis could see up to 40 per cent of private-equity firms go out of business within the next three years as their portfolio companies default on debts, according to one of the darkest outlooks for the industry yet published.
The Boston Consulting Group and Spain’s IESE Business School are predicting that, while 30 per cent of buy-out groups seem certain to survive the crisis, between 20 and 40 per cent of the world’s largest funds will fail.
They based their predictions on publicly available data for private-equity firms, portfolio companies, banks and credit default swap rates, and their own analysis of loan trading levels and default probabilities.
The stark warning comes just a day after SVG Capital, the biggest investor in European buy-out fund Permira, raised £200m ($297m) in a share sale and cut investments in the private-equity firm by more than half to bolster its balance sheet as deteriorating market conditions reduced the value of its investments.
Multiples of earnings before interest, tax, depreciation and amortisation have collapsed, intensifying the negative outlook for the industry. Between 2003 and the end of 2007, multiples grew by 41 per cent in the US and by 43 per cent in Europe.
“Private-equity firms were able to earn a good return from this appreciation without having to improve their portfolio companies,” said Prof Heinrich Liechtenstein of IESE.
“But in 2008, the 45 per cent drop in valuations has changed the situation dramatically, pushing multiples below the level of the previous three to four years.”
The shakeout in the industry will also be driven by the next fundraising round. The climate for fundraising has already deteriorated rapidly as turmoil in the credit markets has forced investors to pull back sharply from the sector. The authors are also predicting rising defaults for buy-outs.
Investors who over-committed during the boom, when cash flowed back fast from buy-outs, are struggling to meet commitments as the flow of cash dries up.
Any debt with a credit spread in excess of 1,000 basis points is considered distressed with a high expectation the company will default within the next three years. They analysed the credit spreads of 328 portfolio companies in November and found that about 60 per cent of buy-out debt was trading at distressed levels.
“This suggests almost 50 per cent of these companies could default during the next three years. With profits deteriorating that number could grow,” Mr Liechtenstein said. |
