Competition raises stakes for industry

Industry’s efforts to match historic returns are compromised by the increased level of competition from rivals, which is making it harder to complete deals, says survey.

Private equity managers face tough times according to the latest research. Increasing competition is the main obstacle preventing private equity firms from completing deals, according to a new survey commissioned by Marsh, Mercer Human Resource Consulting, and Kroll. 

Almost 80 percent of the top 100 private equity firms in Europe feel increased competition poses a significant barrier to completing successful transactions, the survey said. 

Warner: large pension deficits have a major role in price discussions

Edwin Charnaud, European leader of Marsh’s private equity and M&A practice, said: “The private equity environment has changed significantly in the last couple of years.  Competition for lucrative deals is acute, forcing many firms to work harder to stay ahead of their peers and to consider diversifying into new sectors and geographical markets. The risks associated with maintaining historic returns are therefore more pronounced.”

Unreasonable price expectations were also considered a major obstacle by two thirds of respondents, while securing debt and economic and political factors were only perceived to be significant problems by 34 percent and 18 percent of firms respectively.

Respondents to the survey perceived other private equity firms as being the biggest source of competition when trying to identify and secure good opportunities, with 63 percent ranking this group as the biggest threat.  According to respondents this situation is unlikely to change in the short to medium term. 

Once a deal is in the pipeline, the most likely reason for pulling out is a lack of confidence in the management at the target company, cited by more than eight in 10 respondents.   Firms are looking for existing high-quality management teams they can trust to drive their businesses forward.

Chris Morgan Jones, regional managing director, Kroll, said: “Private equity firms should conduct an assessment of a company’s management even before they look at the finances.  As well as helping to identify potential risks, a review will help them to understand and anticipate a management team’s priorities and negotiating style.”

Facing unquantifiable or unknown liabilities was also cited as a major reason for terminating bids, with over half the respondents  saying this was a problem. 
Almost a fifth of respondents said they had pulled out of a deal because the target company had an under-funded pension scheme. 

The introduction of a new Pensions Regulator means that UK companies need clearance before they can proceed with corporate transactions, to ensure pension scheme members’ benefits are not put at risk.  The report said this has added a new dynamic to private equity deals and intensified price negotiations.

Eric Warner, worldwide partner at Mercer, commented: “Like sleeping giants, pension liabilities have started to stir and make their mark on private equity deals.  While large pension deficits will not always cause deals to collapse, they will often have a major role in price discussions.  Like it or not, vendors have to accept that an under-funded scheme could have a great impact on the value of their business.”