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Commenting on the findings of the survey, Warren Scott, co-head of Financial Sponsors at Jefferies International, said: “Financing has changed dramatically – buyout firms would previously have provided five or six times annual operating profit as debt capital, and now they are looking at three to four times. Perhaps unsurprisingly, there is a marked contrast in sentiment towards earnings between the private equity firms and banks that were surveyed. The financial sponsors are more optimistic about the near term earnings of portfolio companies."
The economic outlook is expected to remain bleak until 2010.
- The majority of respondents don’t expect to see signs of an economic recovery before the first half of 2010.
- Overall , respondents welcome the various European government rescue packages for banks and other measures to arrest the economy's contraction, notably announcements relating to tax cuts and investments in infrastructure. However, two-thirds of respondents believe that governments could and should do more to stabilize the economy.
Profits and jobs at portfolio companies are in the spotlight.
- Private equity firms remain optimistic about the performance of their portfolio companies , with half of the respondents anticipating a maximum drop in profits of 10% and one fifth expecting steady or even growing revenues.
- The banks are more pessimistic , with 90% believing that portfolio companies' earnings will fall by at least 10%. Almost one quarter of these respondents are preparing for an earnings drop of at least 30%.
- Portfolio company staff reductions are at the top of investors’ agendas; 90% of German respondents view reducing staff at portfolio companies as a key recession-beating measure , compared to 63% of respondents based in the UK.
- In the event of a covenant breach , respondents expect financing institutions to offer a moratorium on repayment and pay interest only, or to reduce debt by selling assets. Less likely alternatives for financing institutions are debt for equity swaps or putting companies into insolvency.
- Although less than half of the private equity firms surveyed expect to have the opportunity to negotiate payment moratoriums , over half of the banks claim that they would consider this option.
Some M&A activity is expected although financings will be more equity heavy
- The financial crisis has promoted interest in both new private equity investments as well as acquisitions for portfolio companies. Respondents believe target companies will reduce price expectations.
- Leveraged finance groups expect significantly more restructuring of portfolio companies this year than do private equity firms.
- Exits are likely to be slow in 2009 , with the lack of buyer interest being seen as the largest obstacle to deal activity.
- Transactions are likely to require financing structures that consist of a higher equity share compared to previous deals. Respondents expect the financing environment to be restrained with debt capital financing of no more than 50% of transaction volume and a maximum of three to four times annual operating profit.
- Healthcare , energy, alternative energy and environmental services are considered to be the most attractive areas for new investment. Auto, transportation and logistics are the least popular.
The Jefferies 2009 European Buyout Survey was conducted by Jefferies International. In this second annual survey:
- 46% of respondents are based in the United Kingdom , 36% are based in Germany, and the remaining 18% are from other European countries such as Ireland, Italy, Finland and the Netherlands.
- 25% of survey respondents are from Leveraged Finance Groups within banks , and 75% are from Private Equity Institutions.
About Jefferies
Jefferies, a global full service investment bank, has been providing clients and investors with expert advice and execution for over 45 years. Headquartered in New York, with offices in more than 25 cities around the world, Jefferies provides clients with capital markets and financial advisory services, institutional brokerage, securities research and asset management. The firm is a leading provider of trade execution in equity, high yield, convertible and international securities for institutional investors and high net worth individuals. Jefferies & Company, Inc. is the principal operating subsidiary of Jefferies Group, Inc. (NYSE: JEF; www.jefferies.com). Jefferies International Limited, a UK-incorporated, wholly owned subsidiary of Jefferies Group, Inc., was established in London in 1985 and is authorised and regulated by the UK Financial Services Authority.
For further information please contact:
Richard Markus, Managing Director, Jefferies International, will present at the Super Return conference in Berlin on 2 February 2009. If you would like to speak to or meet with a member of the Jefferies team, please contact us.
Tom Tarrant, Jefferies & Company, Inc., 203 708 5989, ttarrant@jefferies.com
Desiree Maghoo, Jefferies International Limited, +44 20 7029 8085, dmaghoo@jefferies.com
Kornelia Spodzieja, Charles Barker Corporate Communications GmbH, +49 69 794090-40, Kornelia.Spodzieja@charlesbarker.de
