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EquityFC Blog
Here comes the money | 1 September 2009
Private equity firms have been sitting on a tonne of cash for the past year - money raised in good times but struggling to find a home while debt finance has been scarce and vendors unwilling to sell. In June the "overhang" stood at $400bn globally. Wow.
Well, it's about to get bigger, at least in the US. According to data from The Deal, "in July and August, buyout shops rounded up $11.65 billion in new capital."(The site also has a good month-by-month summary of US PE activity.) There are three reasons things seem to be kicking off again.
First, debt is creeping back in. Banks might balk at offering recession-hit mid-tier businesses working capital loans. But they have to earn a buck somehow. Lending - albeit at more sensible multiples - to fund cashflow positive buy-outs is a good call.
Second, the market is picking up. There's been a total drought for exits, but with the markets ticking up and corporate strategy (as opposed to cost-cutting) back on the boardroom agenda, the market could get going again. The Deal also says the secondary buyout market is due for a comeback, too.
Third, the industry has recalibrated. I think a genuine sense of contrition has developed in the PE industry over the past year. Massively leveraged deals and wanton profiteering during the boom years has created fall-out (just look at Reader's Digest). Practitioners know they can and do create real value beyond financial engineering. That's why many of the new funds being raised are targeted at mid-market buy-outs - "investors showed a particular preference for middle market-focused shops," claims The Deal about this summer's fundraising - funding growing businesses that can generate true value in the right hands.
Hopefully that will be great news for the mid-market scene in the UK, too.That money has to be spent at some point - so polish up your business plan.
PS - Just a final word of caution. There is still a massive - £100bn-ish - mountain of debt in British business due to be renegotiated over the next 18 months. How that particular problem is handled (both by individual companies and the banking sector as a whole) is going to be a factor in any upturn for the mid-market PE industry.