If you want an illustration of the extent to which the US leveraged finance market has rebounded in the last couple of years, look no further than the latest data from CEPRES, a private equity benchmarking and analysis platform for LPs and GPs.
CEPRES has been crunching some numbers on the financing structures of all the deals in its database, which now number over 4,700 between 2001 and 2013. Back in 2007, at the height of the boom, the median equity ticket was pretty similar on both sides of the Atlantic: about one-third of the total enterprise value of the deal, i.e. an equity/EV ratio of 0.33 (the US was slightly higher, at 0.35).
Fast forward six years to 2013, and the picture has changed significantly.
In Europe, the median equity/ EV ratio shot up in the wake of the financial crisis, and has remained well above the boom-era levels. In 2011, the median equity/EV ratio was 0.50, i.e. firms were covering half of the cost of new deals with equity. Since then the ratio has settled at 0.46.
But in the US, it’s a different story: such has been the recovery in the North American financing market that the median equity/EV ratio is now actually lower than it was before the crisis.
“Things are different in Europe because of stronger regulations like Basel III,” explains Dr Daniel Schmidt, chief executive of CEPRES. “It’s harder and more expensive for the banks in Europe to release debt than in the US. And because the European banks still haven’t yet been replaced by other debt providers, buyout sponsors have to put more equity in.”
But if that sounds like it should be bad news for European deals, the reverse may actually be true, suggests Schmidt.
“If you’re an international investor and you’re concerned about your risk profile, a European buyout may be your first choice. You’ll get a lower return because there’s more equity in the deal, but there’s a lower risk because there’s less debt.”