May 10, 2018
Private Equity: A Spent Force?
While many surveys report a burgeoning market for private equity-driven M&A, this recent article by Prof. John Colley of Warwick University’s Business School says that its best days may be in the rear-view mirror. Here’s an excerpt:
The longevity of the private equity industry brings its own problems. Attractive opportunities have declined as many businesses have already been through PE at some stage. The potential benefits from a secondary PE owner are bound to be less.
Such companies will already have been subject to financial engineering with assets fully leveraged, and costs honed to the point of limiting future growth. Multinationals disposing of business categorised as no longer core have become more aware of the true value in the market. In short, targets are no longer selling at bargain values which characterised many previous disposals.
The article contends that as the market continues to become tougher, we should expect more bankruptcies among portfolio companies as PE firms are forced into riskier bets. In turn, banks will increase the risk premium on borrowings to PE portfolio companies, and will reduce lending to those borrowers – which will squeeze PE returns before it slows activity in the industry.
– John Jenkins