Tough times for private equity

The scramble for assets is increasing, forcing private equity firms to work harder for the best deals according to a report released by consultancy firms Marsh, Mercer Human Resource Consulting, and Kroll.

The survey of 100 private equity firms in Europe revealed that 79% of them see the increasing levels of competition as the biggest barrier to completing deals. Edwin Charnaud, European leader of Marsh’s private equity and M&A practice, said: “The private equity environment has changed significantly in the last couple of years. Competition for lucrative deals is acute, forcing many firms to work harder to stay ahead of their peers and to consider diversifying into new sectors and geographical markets. The risks associated with maintaining historic returns are therefore more pronounced.”

Other headaches high on the agenda for European GPs were unreasonable valuations – 66% of respondents cited this as a problem – and poor management teams. In fact, 82% reported that a lack of confidence in the management of the target company was the main reason for pulling out of a deal. The Marsh et al report suggested this demonstrated that private equity firms are not the asset stripping monsters of folklore, but are in fact seeking high-quality management teams that are able to drive the business forward.

Chris Morgan Jones, regional managing director, Kroll EMEA, said: “Private equity firms should conduct an assessment of a company’s management even before they look at the finances. As well as helping to identify potential risks, a review will help them to understand and anticipate a management team’s priorities and negotiating style.”

Due diligence related issues continue to be a major reason for deal pull-outs, and 52% of firms questioned said unquantifiable or unknown liabilities w as a major reason for terminating bids. Inability to get access to management and competitive time pressures were each cited by 47% of respondents as important reasons for withdrawing from deals.

With so much money pouring into the private equity industry and with so much leverage around, private equity managers regard the biggest competitor for deals is other private equity funds. Sixty-three percent of respondents claimed this was the case, and few see the situation changing soon. Only 20% of participants in the survey regarded corporate vendors as their main competitor, with private equity consortia, investment banking private equity divisions and hedge funds perceived as the greatest source of competition by only 10%, 5% and 1% of respondents respectively.