PE firm fees on the up

Following a strong first half in 2007, an analysis of fee payers shows that mega funds such as Blackstone and KKR have paid more in fees than corporates. On average the top 10 private equity firms spent twice as much on fees compared to the top 10 corporates, according to Thomson Financial’s Private Equity in Focus report.

However, financial sponsor investment banking fees have seen levels drop as the lack of leveraged syndicated loans, refinancing and IPOs, means fees reached their lowest level for the year in September.

Further findings from the report reveal European buyout levels remain low, with only 59 transactions in October worth US$12.3bn, far from the highest level in May at US$50.2bn. Financial sponsor deals represented around 25% of all M&A deals during May and have fallen to around 10% in recent months.

Financing is at a standstill with a dramatically reduced activity of European leveraged syndicated loans issuance in the three months following the credit crunch. There was only one European high yield bond between July and October.

The research reveals mega deals above US$2bn were the worst hit in Europe during Q3 2007. The combined value of all deals over US$2bn totals just US$5.5bn in Q3 against US$54.6bn in Q2.

However, there has been minimal impact on sub-US$500m deals with mid-market deals remaining unaffected by the credit crunch. Total Q3 deals amounted to US$8.7bn versus US$9.3 bn in Q2.

Good news for private equity performance. Buyout returns (net of fees) in Europe are at their highest levels in the one to three year range (42.7 to 18.8%). Looking at the normal timeframe to judge private equity fund performance, five-year and ten-year returns (13.3% to 16.6%) still shows buyout funds outperform public equity, bond and hedge fund returns. It remains to be seen whether long-term returns will be affected by the recent lack of refinancings and a decrease in leverage multiples.

David Bernard, vice-president investment banking and private equity at Thomson Financial, said: “The fundamentals for private equity remain favourable despite the recent liquidity issues in the capital markets. The mid-market sector in particular is showing strong signs of resistance to the effects of the credit crunch”.