Capital markets slow amid Europe chaos

Following a strong first quarter of 2012 that saw ‘wide open’ capital markets in the US and Canada, lending has taken a significant hit, largely due to continued uncertainty in Europe.

Economic uncertainty in Europe, strengthened by recent leadership changes in France and Greece, has led to a slowdown of private equity capital markets in North America.

Between 1 January and 6 June, 2012, loan issuances for leveraged buyouts in the US totaled $13.9 billion, compared to $21.1 billion during the same period last year, according to Capital IQ and Bloomberg.

“The financing markets have gotten very jittery again and a lot of it is probably the ripple effect of what’s happening in Europe,” managing principal at The Jordan Company Adam Max told Private Equity International. “Rates have stepped up roughly 200 basis points and leverage has come down.”

While the US lending environment was “wide open” during the first quarter of 2012, according to Kurt Roth, director at mid-market investment bank Baird, capital markets are “all but shutdown”, he said.

In Canada, where well-capitalised banks continued to lend even during the worst of the global financial crisis in 2008 and 2009, lending has scaled bank in recent months.

“We’re seeing caution amongst lenders across all industries,” said Jeff Parr, co-chief executive officer of Toronto-based mid-market firm Clairvest. “Things overseas are having everybody a little bit skittish. We’re looking at [opportunities] but we’re not getting a lot done right now…The year started off very strong, it’s just in the last 60 days.”

In terms of deal activity, Canada’s private equity market recorded a 37 percent increase in combined deal values during the first quarter of 2012, according to Canada’s Venture Capital & Private Equity Association, while private equity-backed buyouts in the US fell 36 percent in Q1 2012 compared to the same period last year, according to Dealogic.

“It feels like things are slowing down a bit in new M&A processes,” said Baird’s Roth. “We have several IPOs pending that have been delayed until conditions get better. Underwriters and management teams are specifically pointing to political uncertainty in Europe.”

During the next two weeks, “all eyes” are on the 17 June government elections in Greece, Roth said.

“[It’s] astonishing that this little country in Southern Europe is now directly impacting my deal flow in the US mid-market.”