Some companies owned by private equity are likely to go bust in the next couple of years, reigniting media and political focus on taxation and regulation of the industry, a leading figure said yesterday.
"The industry needs to prepare for bad news. There will be large private equity failures this year and next, and press and politicians will get on to us," said Jon Moulton, managing partner at Alchemy Partners.
"Companies will go bust and get into trouble and that is going to be a problem. We have got some savagely leveraged companies out there," he told delegates at the 11th Super Return private equity and venture capital summit in Munich.
Record private equity activity last year provoked concern about the amount of debt buyout firms were using to take over companies .
The industry is now hamstrung by a global credit crunch that makes large buyouts impossible, recapitalisations and secondary deals difficult and returns lower.
Mr Moulton was pessimistic about the prospects for financing.
"Banks are in trouble too. They got left with a pile of unsaleable, overpriced debt," he said. "I don't think we'll see an aggressive banking market for a number of years. Further bad news in the banking sector is more likely than not."
Mr Moulton, a critic of his own industry, drew a parallel with the US sub-prime market, where problems in one area spread into other markets across the globe because of unrealistic financing.
"Buyouts were done on mythical numbers like pro-forma, adjusted, normalised earnings before interest, tax, depreciation and amortisation (EBITDA), which almost always turned out to be 20 to 30 per cent higher than reality," he said.
"We were buying false numbers and doing it willingly but the quality of what we were doing had come down."