The new vintage

As the holiday season begins to fade into the distance, the depth of the current “credit crunch” and its effect on private equity will slowly become clearer. But what are the signs so far? For private equity at least, things are not looking too bad yet.

Private equity funds are still closing. Carlyle has, of course, closed its €5.35bn third dedicated European buyout fund, just under three times the size of its predecessor. CCMP Capital Advisors, a spinout from JPMorgan Chase formerly known as JPMorgan Partners, is in the final stages of raising a new US$3.5bn global buyout fund.

Climate Change Capital announced the close of the Climate Change Capital Private Equity fund at €200m, one of the largest such funds in Europe, and Mid Europa Partners, which focuses on buyouts in Central Europe, has had a €1bn first close of its third fund, Mid Europa Fund III LP.

All these funds are perfectly placed to be the next set of vintage funds buying at the bottom of the market – a much better position than those invested at the top.

The success of the first close for Mid Europa also reflects what is, perhaps, a defining trend for private equity this autumn, namely an increase in investment into Central and Eastern Europe as funds search for new opportunities in this changed market.

In the past week, Advent has opened a new office in Ukraine based in Kiev and KKR is reported to be on the brink of completing its first deal in Turkey, the €734m acquisition of shipping specialist UN Ro Ro. This month has also seen Carlyle establish a foothold in CEE with the opening of a Warsaw office.

However, although investors might still be willing to invest, it is not all plain sailing. It is what happens in the leveraged loan space that will properly define the nature of the ongoing market.

Hedge funds and CDOs are generally no longer there, taking with them a whole swathe of liquidity and the consensus, of course, is that new deals will continue to be different.

It is now accepted that there is a maximum deal size of around €1bn. So rather than super-jumbos, there will be moderately sized deals with big amortising slugs and smaller bullets, and pricing more in line with what it was 18 months ago.

And while banks are actively trying to adjust to the new market conditions, it is how successful they are in syndicating the huge and already underwritten loans on their balance sheets that will be the main market test.

Banks are aiming to reduce the financing risk behind these deals as much as possible. Private equity firms are looking to reduce prices, while vendors are likely to be fighting to keep the terms as they are. How successfully these deals are renegotiated and restructured and how quickly they can or cannot be syndicated will be pivotal.

The first deal off the blocks is KKR’s US$28bn takeover of First Data. Marketing of the US$16bn financing package began this week, with the deal scheduled to close by the end of the month. So for now, all eyes are Stateside.

By Sandrine Bradley