Euro GPs say downturn will last until mid-2010

The findings come from a new survey of 155 private equity institutions and banks which has been conducted by investment bank Jefferies.

The economy will not show signs of recovery until mid-2010 according to nearly all the 155 private equity institutions and banks questioned for the second annual Jefferies 2009 European Buyout Survey.

More than 90 percent of respondents agreed that the outlook for the buyout market will “remain bleak until 2010”. Those surveyed welcome the government rescue packages for banks, but more than 60 percent still believe that their governments should do more to stabilise the economy. 

Staff cuts were named as the best way of securing portfolio stability during the downturn, with 90 percent of German respondents and 63 percent of British respondents viewing redundancy as a key recession-beating measure. 

Banks and private equity firms differed in their views of potential profits: Private equity firms anticipate a maximum profit drop of 10 percent in 2009, the survey found, which is optimistic compared to 90 percent of banks who predict that profits will drop by at least 10 percent, with a quarter of banks anticipating a profit fall of 30 percent during 2009.

Warren Scott, co-head of financial sponsors at Jefferies International, commented on the findings:

“Financing has changed dramatically. Buyout firms would previously have provided five or six times annual operating profit as debt capital, and now they are looking at three to four times,” he said, in a statement.

Transactions are likely to require financing structures that consist of a higher equity share compared to previous deals, the survey found. Respondents expect the financing environment to be restrained with debt capital financing of no more than 50 percent of transaction volume and a maximum of three to four times annual operating profit. A majority of respondents also believe target companies will reduce price expectations for acquisitions and that exits and deal activity in 2009 will slow as a result of “lack of buyer interest”.

Healthcare, alternative energy and environmental services were considered to be the most attractive areas for investment during the recession, the survey found.

Of the institutions surveyed 75 percent were private equity professionals, and 25 percent were professionals from leveraged finance groups within banks. 46 percent of respondents were based in the UK, 36 percent in Germany, and the remaining 18 percent from Ireland, Italy, Finland and the Netherlands.