A stat heavy week this week as three sets of data about the plight of the industry have revealed three very different, albeit linked, pictures.
By far the most gloomy is CMBOR, which told us that the UK private equity buyout market is diving faster than Cristiano Ronaldo. Just £3.2bn was invested in the first half of the year, for which you have to go back to 1995 to find a lower number.
Despite all the talk of green shots, the banks still aren’t lending anywhere like they were or even anywhere near where the buyout guys want them to be. The rest of the year is going to be a hard slog to shift all that money raised in the golden age – US$2947bn was raised, globally, between 2005 and 2007 according to Preqin.
It will have to be shifted though. There are countless firms, especially the mega boys, have barely done a deal for a year, yet most of them have just had their investor meetings where surely some pressure was exerted to spend some of that money rather than earning money off of it.
Of course, many investors are in no position to exert such pressure, and others won’t even want money to be spent out of fear they won’t be able to meet the capital calls, which puts both sides of the GP-LP equation into an awkward alignment.
There is still LP money out there however, as Preqin revealed that 82 funds raised US$76bn in Q2 this year, up from US$60bn the previous quarter, although this is still the lowest figure seen since Q1 2005.
The number of funds on the road has fallen by 10%, with there being 30 confirmed cases of scrapped fundraisings, and of the 1,622 funds chasing the dollar, almost half have held an interim close.
The fall in the number of fund raisings should theoretically make it easier for funds still out there to raise money – less competition and all that – but the problem is the number of funds that are still out there is historically massive. At the start of 2008, after the sub-prime crisis but before the banking crisis, 1,304 funds were on the money trail. At the start of 2007, around about the peak of the buyouts boom, 918 funds were looking for cash, looking for US$396bn.
The third bit of data this week comes from Grant Thornton, which takes a more personal approach and asks some private equity practitioners their views on the industry.
Their headline stat is that 57% of 100 respondents think that deal flow will pick up over the next 12 months. Apparently the grass is also green, the sky is also blue and bears very often go to wooded areas for personal reasons.
Deal flow is now so low, there is nowhere it can go but up – although that said, the next two months are likely to sink to new lows as the summer kicks in. There’s also the added issue of the respondents not wanting to talk down their industry too much, both to guard against self-fulfilling prophecies and to soothe LP fears.
In fact, 57% is actually quite a low figure and a sign of the pessimism of the industry if only a little over half think the market isn’t going to pick up over the course of the next year. Twenty percent of respondents expect activity to fall.
One interesting nugget was that 25% of private equity firm have shifted their focus to distressed assets whilst 20% were “content” with acquiring minority stakes.
This shift could be cause for concern as opportunistic strategy shifts often are – whilst it might make sense to change how you work in response to market conditions, it can be difficult to do it well outside your comfort zone. As I discuss in the latest issue of EVCJ in my article about growth equity, taking minority stakes, and then managing those investments, is not quite as easy for the LBO guys as it is for the funds that have been doing it for years already.