JP Director's Report

Private Equity: Signs of recovery on the horizon

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As a potential seller in company transactions, one is always well advised to also target a few private equity companies apart from the strategic candidates. The venture capital companies are often highly professional and reliable partners when it comes to the sale of a company or finding successor arrangements. Private equity firms are furthermore known for their prompt implementation of a deal. With good preparations (information memorandum, structured due diligence, clear objectives etc.) by the seller’s M&A consultant, the transaction can be realised in only a few months.

Since 2008, however, the experienced merger consultants have been noticing that the venture capital companies are increasingly withdrawing from the market. Although there was still some buying interest. But when push came to shove, the private equity managers beat a hasty retreat. Private equity companies found refinancing of transactions very difficult indeed. Instead of a 20 % equity ratio, as in boom conditions, the banks now demanded 50 %, for instance. The leverage effects we have become used to were thus no longer realisable. Frequent change of management in the individual venture capital companies was another sign of new times in the private equity business. The previous managers were fired or pensioned off. The new bosses tightened the belt and significantly raised the demands for the few remaining projects.

The private equity slump affected all areas and size categories. In 2009, for instance, there was only one transaction over EUR 1 000 million in Germany. Compared to 2007, this is a reversal of over 90 %.

But the first rays of hope are appearing in Germany (and also in the EU overall). Between the first and the following six months of 2009, the transaction volume doubled in this sector. Also the exits increased significantly. The prices have shown a clear drop, however. In boom times, high single digit or even 2-digit multipliers were paid for companies. Today, multipliers of 5 or less are the norm.

Nevertheless: The market shows clear signs of improvement for company transactions. Certainly since autumn 2009, JP Mergers & Finance has noticed a strong buyer’s interest, mainly in the mechanical engineering, technical services, telecommunication and banking sectors, among other. Interest emanates especially from countries such as India, Great Britain, Poland, Brazil etc. We view this development as a sign that the private equity market will also normalise again soon.

Best regards

Heinz Jäger