PE firms wary of debt levels

Research from Close Brothers Corporate Finance focusing on mid-market private equity groups reveals that 90% of private equity groups are taking less debt than banks are offering them.

While 74% of private equity groups expect some degree of deflation in the debt markets, the research shows that over a quarter believe the shift in the debt markets over the past two years is here to stay.

The research also shows there is a high level of willingness to consider investing in companies with defined benefit pension schemes – nearly half of funds would invest in a company even if it had a scheme in significant shortfall. However, private equity groups view recent changes to UK pensions regulations as a negative development. While many have not encountered the new pensions regulator, only 5% of private equity groups think the new pensions regulations are a positive development.

Mark Barrow, head of private equity coverage at Close Brothers, said: “The traditional risk-takers, private equity funds are now turning down what they perceive as excessively risky debt packages in favour of a level of debt that gives a company room to breathe. The buoyant debt markets have given rise to a situation where lenders are taking equity risk.”

He adds that many private equity groups are unhappy with the new pensions regulations. They feel the new regulator adds uncertainty, moral hazard and leaves them lacking control of the transaction process. He says: “This is already hindering private equity’s ability to work with firms with defined benefit schemes at a time when we should be encouraging funds to find ways around this issue. As a result, many companies will languish without private equity support.”

For the survey, Close Brothers questioned 30% of UK-based mid-market private equity groups, based on 100 groups in this space, in a combination of one-on-one meetings and telephone interviews