Private equity deals have been slowing down as the financial markets constrict. Ashley Broomberg, of Matrix Private Equity partners, explains why he thinks 2009 is going to be a 'vintage year' for private equity.
Matrix sees 2009 as a vintage year for investment. We expect much more realistic pricing to have emerged by January 2009 and there will be excellent buying opportunities for those investors whose portfolios have remained in good shape and who have the relationships to access the best deals and liquidity to capitalise.
The opportunity could be more exciting if the banks tighten supply of finance to smaller companies. This has not occurred yet, but may have by then.
Deal completions continue to be at a depressed, low level. The temporary spike driven by capital gains tax changes in April masked a downward trend coming out of 2007. Savvy investors who called the market correctly sold actively through 2007 and up to the end of April 2008 at attractive prices. Those same investors’ new investment programmes were limited and very selective.
The period after April 5 has seen increasingly gloomy economic data.
Some, including Matrix saw this coming and see the current data simply as realistic. For almost all now though, this has caused a flight to prudence and quality amongst buyers. This is despite significant liquidity being available.
Most buyers are now focused on the implications the economic and market data holds for 2009, but too many sellers remain fixated by the heady valuations achieved from 2007 sales. A relative deal completion “famine” is emerging from this major misalignment between buyers and sellers on price. We have seen this phenomenon before earlier in this decade and on that evidence, we expect low levels of deal activity for the rest of 2008, despite the fact that debt remains available to finance deals.”
Where buyers have come to terms with the price expectations of vendors, they now have to deal with a downward moving target of earnings, further reducing confidence levels in being able to complete deals.
These conditions pose threats to private equity’s existing portfolios and the damage from any poor risk management will already have been done.
Those investors that are affected will sponsor equity re-financings. We will see many more follow on investments in existing private equity portfolio companies.
Not all these “deals for the wrong reasons” will be reported. Some investors may be severely affected and those without sufficiently large portfolios or sufficient liquidity will see their track records irreparably damaged.
For 2009 Matrix forecasts that deal completions will pick up sharply as buyers and sellers move to a new meeting of minds on price.
Signs of this are on the horizon already in the residential housing market. Those that must sell or feel they have to sell have to accept lower prices to achieve this now, even if quality assets are involved.