GPs bet on active M&A market

Many professionals remain confident that the M&A market will remain busy, with over 70% of European private equity firms mulling concerns that overleveraged buyouts will reduce returns in the future.

Private equity firms and mid-market corporations are taking a bullish stance to the European M&A market in the second half of 2006 according to a new survey. However, the survey noted that there is widespread concern regarding the over-aggressive gearing of buyout deals.
Over two-thirds of senior executives surveyed by KPMG for its Mid-Market M&A Outlook study expect M&A activity to increase in the next six months, with the same proportion believing that valuations will also rise.
The forthcoming M&A activity is also to reduce typical private equity holding periods of three to five years even further.
Just under a third of private equity firms will focus on fundraising in the second half of 2006, while around 75 percent expect to be in acquisition mode during the period, said the report.
However, a significant majority of private equity firms are wary of the implications of rising valuations, with 70 percent agreeing that many of the recent and existing investments by mid-market private equity houses are overleveraged. The respondents said that some of these deals could collapse and potentially cause a crisis in the market.
However, commenting on the survey, Steve Halbert, head of middle market at KPMG Corporate Finance, cautioned against a knee-jerk reaction against market fundamentals taking a turn for the worse in the near future: “Many commentators have been calling the top of the market for some time yet we appear to be hitting new levels with no sign of arrest,” Halbert said in a statement. “Many predicted we would run out of road but the landscape has changed to keep apace. Transactions are better structured than they were during the last M&A boom. There is a bit more equity going into deals and therefore reducing both the risk and potentially the returns.”
KPMG’s report tallies with Coller Capital’s fourth Global Private Equity Barometer, released today, which said that surveyed limited partners were unanimous in their opinion that the aggressive leverage currently being applied to buyouts will reduce their returns from European and North American funds in the future.
As a result, said the Coller report, private equity will increasingly turn to the public markets, with three quarters of LPs expecting the number of ‘take privates’ increasing over the next three years. LPs also expect GPs to increasingly tap the Asia-Pacific region for the best buyout opportunities with around 40 percent to 50 percent declaring the region to be very attractive.
Despite this, LPs’ appetite for private equity is not expected to be reduced. Approximately half are planning increased allocations to alternative assets generally, and private equity in particular (with 48 percent) in the next twelve months.
Coller Capital said that returns from private equity investments increased in the last year, with almost three quarters of LPs reporting net returns of 11 percent or more over the lifetime of their portfolios, compared with half in the Winter 2004 to 2005 Barometer. The improvement, said the report, was mainly driven by buyout funds.