Private equity shows signs of recovery next year

AS WE move into the fourth quarter, prospects for private equity look promising as capital markets and the economy stabilise. But, as firms turn their attention to strategy for 2010, is it too early to be talking about a full-scale revival in the industry next year?<br /><br />One man thinks not. Bob Henry at small buyout specialist Matrix Private Equity Partners yesterday published a note highlighting &ldquo;signs of life&rdquo; in the private equity market after a dearth of transactions in 2009. He rightly points out that this year has been dogged by few buyers and investors looking for investments and neither buyers nor sellers knowing what the market price for their business was. Added to this, tight credit markets have made it hard to borrow money for deals.<br /><br />Talking to some of the UK&rsquo;s leading private equity firms reveals signs of renewed confidence, however.<br /><br />One private equity partner predicts 2009 would not be as bad as people feared when the year began. &ldquo;There are some signs of capital markets unfreezing to stimulate opportunities to realise investments and to acquire new investments but it remains a slow-paced recovery,&rdquo; he said. Another senior dealmaker reckons next year may see the return of mergers and acquisitions in the sector as the deal flow resumes, albeit with a lower level of leverage from the boom years.<br /><br />And one of the biggest London private equity firms has seen valuations stabilise in the first half and believes further improvements are on the cards. &ldquo;It is encouraging but it is unclear how sustainable this is but there are clear signs of early improvement,&rdquo; a spokesman for the firm said. The firm also sees more opportunities in the pipeline for investments.<br /><br />This echoes evidence from the US &ndash; which registers change ahead of the UK &ndash; where initial public offerings are returning along with activity in the bond and credit markets. What remains unclear is the timing of the recovery.<br /><br />The contrast with the boom years of 2006 and 2007 is stark. In 2008 private equity and venture capital investment by UK-based firms was &pound;20bn &ndash; the lowest for three years compared with &pound;31.6bn in 2007 and &pound;21.9bn in 2006. Clearly it has been harder to cut a deal as investors hang onto their cash and business owners hold out for better valuations. So one factor that will drive deals next year is the greater consensus between buyers and seller about price, according to Henry, who adds that vendors realise the frothy valuations seen in 2007 are unlikely to be experienced again &ndash; at least until the current recession is a distant memory &ndash; and buyers have realised there is a proper price to pay for good assets.<br /><br />It is fair for Henry and others to call the beginning of stabilisation for the private equity industry. But talk of a full-scale revival is premature.<br />