PE activity starts to pick up but lenders wary

John Kavanagh
The first signs of a recovery in private equity activity have emerged in the latest Australian Private Equity & Venture Capital market survey, but bankers remain cautious about funding deals and are applying debt multiples not seen since early last decade.

According to the AVCAL survey, released on Friday, a total of 63 PE deals were done in 2008/09, compared to 78 in 2007/08 and 94 in 2006/07. There were 27 deals in the six months to December.

There is some evidence that things are turning around. The 13 deals done in the December 2009 quarter represented greater activity than in the three previous quarters.

The average transaction debt multiple was 3.1 times EBITDA in the December 2009 half, which is half the leverage banks were providing in the 2006/07 boom year.

The value of deals done was $4 billion in 2008/09, compared to $12 billion in 2007/08 and $25 billion in 2006/07.

There was a shift from new deals to the development of existing investments. Of the 63 deals done in 2008/09, 32 were bolt-ons, compared to 29 in 2007/08 and only 17 in 2006/07, according to the AVCAL survey.

Most of the damage has been at the high end. The number of deals involving companies with an enterprise value of more than $250 million fell by 63 per cent between 2006/07 and 2008/09.

The number of mid-range deals, involving companies with enterprise values between $50 and $250 million, fell by only seven per cent over the same period.

Valuations have returned to 2005 levels. In the December half the average multiple paid on entry was six or seven times EBITDA.

The average transaction debt multiple has fallen from six times EBITDA at the peak of activity in 2006/07 to three times EBITDA for the most recent deals, according to the survey. The debt multiple is still falling, down from an average of 3.6 times in 2008/09 to 3.1 in the December half.

Margins on what are still, usually, highly leveraged loans for private equity buyers are around twice what they were before the financial crisis.

CHAMP Private Equity, for example, is looking at paying a spread of between 425 basis points and 450 bps to lenders supporting its acquisition of ATF Services (a supplier of temporary fencing) from Quadrant Private Equity. GE Capital, National Australia Bank, Natixis and Investec are the banks providing this loan, basis point reported on Friday.

Industry participants noted that lead times for credit approval were longer, AVCAL reported. Tighter lending terms included decreased leverage covenant limits and increased restrictions on equity distributions.

As the debt multiples have come down the level of equity invested by PE managers has gone up. The proportion of equity invested in total deal value increased from 34 per cent in 2006/07 to 58 per cent in 2008/09.