Listed firms shrink debt levels

In a bid to better position themselves for future market ‘wobbles’, a recent study found Europe’s most highly leveraged listed private equity firms have cut their average net debt by half.

Listed private equity companies in Europe have made significant progress in deleveraging their balance sheets, according to research from advisory and research group LPX, and are now in a better position to withstand future market volatility.

LPX analysed 55 listed private equity businesses, accounting for 80 percent of the sector’s market capitalisation in Europe, and found that 19 companies have negative net liquidity ratios, meaning liquid assets minus liabilities as a proportion of net assets.

These 19 net levered companies have reduced their debt levels by almost half since December 2008, the research said. Their average net liquidity ratio had been cut to -9.9 percent to -18.9 percent.

The sector is “better placed to withstand a wobble in markets” than it was 18 months ago, said a London-based equities analyst, with liquidity being boosted by increasing underlying NAV valuations, relatively strong realisations compared with investments and certain companyies raising equity or selling fund interests on the secondary market.

A number of listed companies, including SVG Capital, Hg Capital, 3i Group, JZ Capital Partners and JPMorgan Private Equity Limited, have raised fresh capital in the last 18 months.

3i, the largest listed private equity firm in the UK, recently indicated it had returned to investment mode having spent most of the financial crisis dramatically reducing the amount of leverage on its balance sheet. In results announced earlier this month, the firm said it had chopped its net debt to £258 million (€301 million; $371 million), down from £1.9 billion in 2009, via a series of measures including cost-cutting, asset sales and a rights issue.

Recovering asset valuations have helped liquidity significantly, noted Iain Scouller, analyst and partner at Oriel Securities. “When asset values go up, overcommitment levels go down arithmetically,” he said.

Members of LPEQ, a group of 18 listed European private equity companies, welcomed the research. Peter McKellar of listed fund of fund SL Capital Partners said that the research demonstrated a “successful” deleveraging process among European listed firms and that the sector was now better positioned to capitalise on new investment opportunities.