The stock market could provide easy pickings for private equity, according to debt market research published by Deloitte. Listed companies are at risk from hostile takeover approaches from private equity firms because many of them are under leveraged. The current generous pricing of debt has failed to persuade many listed companies to increase gearing, fund transaction activity or plug pension shortfalls. The report says, “by not capitalising on this situation, they may be inadvertently leaving themselves open to hostile takeover bids.”
Aidan Birkett, managing partner of the corporate finance practice at Deloitte, said: “Globally, the private equity market raised €248bn in 2005. Based on an average equity to debt leverage ratio of three, this means there is around €1trn looking for assets to acquire. While the corporate market lets its capital reserves gather dust, the private equity industry is looking to invest 43% of the market capitalisation of the FTSE100. A balance sheet that can absorb more debt could also absorb the debt of a leveraged private equity takeover bid.”
A further finding expressed concern over the increasingly complex debt structures now being used. With some deals seeing up to nine different levels of debt being used, such a complex arrangement could make financial restructuring difficult.
Gerry Loftus, reorganisation services partner at Deloitte, said: “The increased trading of complex debt instruments, particularly in the last two years, has made restructuring a much more difficult task. In some cases, complexity may create a bar to restructuring. There is an increasingly large range of ‘faceless’ creditors who may well have differing motives when a business is in distress. This can be especially difficult for the management of the business if, for example, some of the creditors want to pursue a quick exit rather than a longer-term rescue strategy. While recent insolvency legislation has encouraged a ‘rescue culture’, we predict that some good businesses that do not meet growth expectations will face increasing difficulties in resolving finance structure issues.”