VideoWhat's in a name? When the name in question is SuperReturn International, an annual conference for private equity professionals, the answer is a lot of hubris and even more irony. A celebratory affair when private equity players were helping to fuel an M&A boom, February's SuperReturn International raised questions about whether its name was still suitable given that private equity returns across Europe fell 25% in 2008.
If nothing else, though, the plight of the shindig is certainly symbolic of
what has happened to private equity firms in recent years. In 2006 and 2007, as Mark Spinner, head of the London-based private equity team at law firm Eversheds, recalls, they were the "golden children" who could do no wrong. "All they had to do was deploy money in the market, refinance two years later and then sell the asset," Spinner says.
But then the tide turned. The biggest players, including big US private equity firms KKR and Blackstone, have taken massive write-downs on their investments. Others are agreeing to give money back to hard-up investors rather than hold on to it for deals that may never materialise. "Now [private equity firms are] actually having to work hard for their money," Spinner says.
And that goes for their CFOs too. Like their counterparts in other industries—and indeed their own portfolio companies—finance chiefs of private equity houses are getting to grips with the challenges of the downturn, whether that's frosty banking relationships, intense investor-relations exercises or balancing short-term reactions to the crisis with long-term growth plans. Now the actions of these spotlight-shy CFOs could determine how the next wave of private equity deals plays out—and whether the returns will be described as anything approaching "super" again.
Questions of Capital
A particularly pressing challenge for private equity firms is the disappearance of debt. The finance director of a mid-market pan-European firm says that when he attempted to secure €500m recently to refinance a portfolio company, he approached 25 banks, of which only seven were interested. Even then, the banks would lend only half the required amount between them, leaving the firm no choice but to walk away and hope to refinance another day.
For other finance chiefs, a lack of familiar faces is as startling as a lack of funds. "People you've done business with [for] the past four, five, six years who were at a particular bank or institution have gone," says Ashley Long, CFO of GMT Communications Partners, a London-based private equity firm specialising in Europe's communications sector. "And if they haven't gone, their role is changing, their hands are tied or the bank has just basically shut up shop."
Perseverance can pay off, however. In February GMT refinanced the senior debt facilities of portfolio company Redext, a Spanish advertising business. The company's existing lenders—BBVA, Banesto and CAM—provided €26.5m of senior debt facilities for working capital.
At Mid Europa Partners, a private equity company which invests in central and eastern Europe, chief operating officer Bill Morrow has accepted that credit lines will now be "priced beyond all recognition" and much less flexible than once would have been the case. "The banking market is not shut; it's just not the same," says Morrow, who, in the absence of a CFO, oversees Mid Europa's finances. "There's no underwriting, it's expensive, it's clubs and so you have to deal bank by bank. It's excruciating. But we're still talking to people, still finding ways to do stuff. It's not all gloomy out there."
For firms unable to arrange debt funding, or which would rather not overload businesses with borrowing, there have been two choices: hang back from deals or use their own funding. At London-based Alchemy Partners, one of the two acquisitions completed last year—a €62m bid for Geo Networks, a UK-based optical-fibre network owner—was funded entirely through its own capital, with no third-party debt. For finance director John Rowland, a lack of debt is "no bad thing" for private equity if it prevents companies from over-extending themselves. "There's nothing wrong with a levered business as long as you're not over-levered," he says. "The problem [in 2006 and 2007] was that sometimes the banks were offering more than they should have done, and it takes a lot of discipline from the investment committee to take less when it's being offered."
Even more worrying than banks refusing to back deals is the threat of investors in private equity funds themselves having to back out of commitments. In general, the management fees that institutional investors pay private equity firms give industry CFOs a degree of revenue visibility their peers in other industries can only dream of. "If I were a CFO of an industry company today, I think it would be extremely difficult to have one business plan for 2009," says Christophe Florin, CFO of Paris-based AXA Private Equity. "In our business we don't have that [problem]."
But a different problem arises when institutional investors no longer have the cash to honour capital they've promised to back deals. High-profile cases include the UK's Candover Investments, which invests in funds owned by a private equity subsidiary, Candover. Now struggling with liquidity problems, Candover Investments said in March that it will not be able to meet a €1 billion commitment to Candover. Speculation is now mounting that Candover will not survive as a private equity house.
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