Deal freeze

General partners must patiently wait for deal flow to thaw, writes Nicholas Lockley.

So it’s official. The leveraged buyouts in Europe are grinding to a halt as vendors fail to take into account the new reality of the post-credit crunch landscape. Buyers’ valuations have fallen. Vendor expectations have not.

The decline in European buyouts has spread fully across all deal sizes as deal volume in the formerly resilient lower mid-market, defined as deals less than €160 million ($250 million), fell by 43 percent on the fourth quarter to €4.7 billion, and the number of deals fell by 37 percent to 109, according to Candover, the European buyout firm.

The number of private equity-backed acquisitions fell to 137, the lowest quarterly total since 2004 and a 33 percent drop on the fourth quarter of 2007, while deal volume also fell 32 percent to €19 billion.

Growth capital was also affected, with the value of deals falling 57 percent to around €1.2 billion, across 102 deals, a decline of nearly 28 percent.

The deals are on ice. Go home early. See the kids. Enjoy the lighter nights.

As Jon Moulton, managing partner of Alchemy Partners, pointed out earlier this week at UK trade association the BVCA’s 25th Anniversary conference, the deals will come and possibly from within the industry’s own portfolios.

“Overleveraged businesses will drive the industry. There will be good opportunities. Don’t invest quite yet. Wait till the fear arrives.”

He said the banks would slowly drift back to business, but they had never sustained this much damage before: “They did it to themselves and they need to rebuild their capital and their confidence.”

But it will take time. Moulton told of a recent public to private opportunity for a business that had £200 million of unsecured bank debt with £300 million of hard assets on its balance sheet. “The banks would only provide £150 million of secured debt. I’d have to deleverage to bid for a public company.”

These are strange, uncertain times. When the thaw comes, the deals will flow. Or, as Rod Selkirk told the conference, now is the time for limited partners to invest. This promises to be a great vintage. Eventually.