Dealmaking in the downturn

Fund managers move to diversify their portfolios as CEOs shed non-essential assets. Andrew MacLeod reports on doing deals in the tough times ahead.

Fund managers move to diversify their portfolios as CEOs shed non-essential assets. Andrew MacLeod reports on doing deals in the tough times ahead.

Fund managers move to diversify their portfolios as CEOs shed non-essential assets. Andrew MacLeod reports on doing deals in the tough, yet extremely profitable, times ahead.

Patrick Dunne has some down-to-earth advice for investors wondering how to weather what promises to be a turbulent 2009 – they should spend more time and thought on their portfolios.

As 3i’s communications director, Dunne is not alone in forecasting that the difficulties facing the capital markets in the coming year with be “challenging”.

That euphemism can rarely have been so heavily charged with understatement as it is today, considering the problems funds are facing in attracting investors.

“The general macroeconomic environment looks pretty tough,” Dunne concedes, pointing out that the chill facing capital markets is mirrored by the debt freeze that has slowed new deals to a glacial pace.

“I think the picture is different from one country to another, and even from region to region, but there has certainly been a general slowdown,” he says. “For most PE firms, the three words for 2009 are portfolio, portfolio, portfolio.”

Diversity is vital, he says.

Modus operandi

“The ability to protect value in the short term, then grow it afterwards, is basically a PE firm’s track record, and that is key in everything they do, from winning deals to raising money.”

Dunne says this has been the focus of most private equity investors for some time, and will continue to be at the top of their agenda – or thereabouts – for the foreseeable future.

He also makes the point that an economy can only draw in its horns for so long, and sooner or later a degree of normality returns.

Dunne says: “We’ve been through a number of cycles before, and they are all different. What we do know is that there comes a point when the private equity firms decide it’s time to go shopping again. We’re not at that stage yet, and the rosy scenario would be that it comes in the second quarter.

“More realistically, it’s probably not going to happen before the third quarter, and the most likely view is that it will be the fourth.”

The uncertainty arises because outside influences are at work that affect the speed of the sector’s recovery, says Dunne, who points to the disastrous effects on the market of the credit crunch and the worldwide fluctuations in the price of commodities.

While the banks remain too paralysed with shock at the revelation of their own mortality to resume normal lending patterns, the dealmaking climate will remain tough, but at the same time enormously profitable.

“If you look back at previous difficult times, they are exactly when the best vintages have occurred, for example, 1992-93 and 2001-02,” says Dunne.

Sign of the times

One sure indication that dealmaking is back on the agenda will be changes at the top of large corporations. “We haven’t seen it yet, but we will soon,” says Dunne. As old CEOs go out of the door, they take with them the cherished projects to which they have emotional attachments.

Incoming executives have different priorities and tend towards the disposal of non-core activities as a quick fix. Indeed, tough conditions or not, some hardy investors are simply getting on with the business at hand.

Among the acquisitions and disposals announced recently is one completed by HgCapital last month. The European sector-focused private equity investor disposed of its payment business, Orbiscom, to MasterCard for $100 million (£67 million).

HgCapital has funds under management of e2 billion, and the transaction brought to 16 the number of exits it has achieved since June 2007 when the credit crunch began. The sales have realised a total of £1.2 billion at an average multiple of 2.7 times original cost.

Last year saw a clutch of high-value transactions by Lloyds TSB Corporate Markets. In the Midlands alone there were four in excess of £100 million, and one – the acquisition of Somerfield by the Co-operative Group – topped £2 billion.

Simon Sterling, relationship director with Lloyds TSB Corporate in the Midlands, also uses the word “challenging” to describe the coming 12 months, during which he believes liquidity in the wider banking market will remain tight.

However, despite the increased cost of debt, he says that for customers offering well-rounded and well-founded relationships it will not be excessively expensive or rigid.

Customer loyalty

In the new world, it seems, loyalty will be rewarded, and customers seeking more from their banks than a quick loan are likely to be treated more favourably. Sterling insists the normal rules of business still apply, although with a little more rigour than may have been the case in the past.

“Credit criteria are being reviewed more stringently, and in the larger corporate market – firms with a turnover of between £75 million and £100 million – there is probably a more realistic expectation around the price of debt,” he says.

“We are very happy to engage with prospective new customers who are willing to offer us a rounded relationship.

“But it clearly has to work both ways. It’s not just about debt transactions.”

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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