European buyout firms face struggle to exit deals

LONDON Mon Jan 21, 2013 7:47am EST

LONDON Jan 21 (Reuters) - European private equity firms will struggle to find profitable ways to exit their boom-time deals, as the industry's traditional exit routes remain largely shut, a report said.

Altius Associates, one of the largest investors in the private equity industry, said the market for initial public offerings - one of private equity's favoured routes for selling down the stakes in firms they own - remained largely closed.

Sluggish economic growth and the euro zone debt crisis have combined to heighten volatility in stock markets in the past few years, leading many companies to put off IPO plans until markets are more stable.

Meanwhile, private equity firms are unlikely to be able to get the financing required to purchase portfolio companies from their rivals in the secondary market.

Sales to trade buyers - or those in the same industry - will struggle to get done as companies hoard cash in the tough economic climate.

"In many cases the clock has reached the five-year mark and is very definitely ticking," Charles Magnay, partner at Altius, said in the report.

Private equity firms which struck multi-billion dollar deals at the height of the boom just before the financial crisis in 2008 and 2009 now find themselves stuck with the companies and unable to find buyers offering attractive prices.

According to data last year from consultancy firm Bain & Co, 40 percent of companies bought with money raised from 2004 to 2008 are worth less than the private equity group paid for them.

Many have been relying on doing deals between themselves in what is called the secondary markets. These deals, however, tend to earn managers lower returns than selling to trade buyers or listing companies on public markets.

Altius said the secondary market was becoming increasingly transparent and crowded, with big inflows of funds into the market making it tougher to generate strong returns with the deals that do get done.

In the first nine months of 2012, $15.7 billion was raised by funds wanting to invest in secondary markets, with the amount on course to beat the record fundraising of 2009.

The report also warned private equity investors that rising competition for high quality deals in the U.S. had pushed prices higher, making it harder for firms to extract value from the companies they buy.

Altius said private equity flows into China, Peru and Colombia were set too boom, while too much money had flowed into Brazil, Turkey and Indonesia in recent years.

"The one challenge that affects all of these regions, despite the differences in demographics, proximity to developed markets, and an abundance of natural resources, is fundraising," Elvire Perrin, partner at Altius, said.

Altius advises and manages more than 18 billion euros ($24 billion) in private equity funds.