No quick fixes for Europe
By Paul Mackintosh - 22/10/12
The continuing grinding pressure of the global financial crisis is having a visible effect on M&A volumes, especially in Europe. With uncertainty rife, businesses simply do not want to make decisions, it seems, and are content to hoard their cash and wait for even slightly more predictable times. Governments may want companies to come off the fence and start re-energising economic activity, but until they can come up with their end of the deal and deliver the kind of comprehensive resolution that the markets want, the private sector is unlikely to respond in kind.
But what about the consequences for private equity? This is an era, remember, when limited partners (LPs) are looking to alternative assets to deliver yield in a returns-starved world, when investors will actually pay the Swiss and German governments to hold their money. Outperformance under such conditions is not so hard to achieve, especially when alternative forms of leverage are becoming available to replace bank senior debt. In some respects, general partners (GPs) ought to be able to achieve results and justify the faith, and cash, placed in them by today's investors.
Alas, the kind of depressed M&A market we are seeing in Europe is also likely to depress returns in Europe, even for this supposedly counter-cyclical asset class. If this was a normal business cycle, then funds would be able to eke out the down leg through their life cycle and still exit investments within the six-to-eight-year time horizon through listings or trade sales. But the kind of exceptionally prolonged downturn we are seeing now is going to test the duration of even typical buyout funds. And private equity guys are no more immune to uncertainty than anyone else: if they cannot get clarity on the business prospects for their investments, on the financial prospects of being able to lever or recapitalise them, or on the possibilities of being able to sell or list them – they simply will not pull the trigger and invest.
This is why, even with interest rates at such historically low levels, deals are not happening and the prospects for returns in the mid-term are being progressively eroded. LPs in Europe cannot expect private equity to be a panacea for the market's broader ills. As the current pullback of prospects, even for China, shows – short of some genuine political courage and strategic vision in Europe, there are no quick fixes.