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Solid first quarter boosts private equity hopes

IT is not all doom and gloom for private equity. That’s how one senior private equity partner described the current outlook to me over breakfast earlier this week.

Yet it is an argument that has seemed without foundation during the early part of 2010, which in terms of both the number and value of deals has continued to be much subdued from the halcyon days of the buyout boom in 2007.

According to the latest Barometer report from Private Equity Insight, overall activity levels were flat in the first quarter of this year. However, some good news emerged in the form of the total value of private equity investments – which rose almost three-fold year-on-year. The report also found €10.5bn of deals were completed in the first three months of this year, representing 226 transactions. That compares with just €3.5bn, or 217 deals, in the same period last year. If this trend continues, 2010 should see a significant improvement compared with the previous 12 months.

One reason more deals are beginning to be done again is because debt packages become more readily available. Nevertheless, for the time being deal activity is more of a trickle turning into a steady stream rather than a great flood, a situation that is likely to persist for at least another year.

Closer scrutiny of the deal data for the first quarter of 2010 reveals an interesting trend. The €10.5bn (£9.1bn) of deals completed were not comprised of a single mega-transaction, but rather a raft of buyouts at the upper-end of the mid-market, the Barometer report reveals. This could be interpreted as a sign that liquidity is returning to debt markets in what the report terms “a more consistent, and perhaps less overheated” manner. Taken together, the statistics are promising because the first quarter is traditionally eclipsed by subsequent quarters as investment activity gathers pace – notwithstanding the current sovereign debt crisis that is dominating the macro economic environment.

A further indication of the potential recovery in private equity can be gleaned from discussions with leading private equity investors such as SL Capital Partners, the long-established private equity fund-of-funds manager spun out of Edinburgh insurance group Standard Life in 2007. Chief executive David Currie and his chief investment officer Peter McKellar are upbeat about prospects for mid to large-cap private equity investments going forward, particularly on the other side of the Atlantic.

The pair revealed SL Capital Partners is about to launch another US fund-of-funds – with the target of investing into funds of up to $1bn – and is looking to raise a couple of hundred million dollars from investors.

With firms like SL Capital Partners prepared to put their money where their mouths are, the immediate outlook for private equity is looking increasingly encouraging.

ben.griffiths@cityam.com