(Repeats story from late on Thursday)
* Q3 private equity deals down 29 pct from year ago
* PE dealmaking also down 22 pct from second quarter
* Volatility, higher rates make buyout deals costly
By Simon Meads and Soyoung Kim
LONDON/NEW YORK, Sept 22 Tough financing
markets and market turbulence are causing sellers to shelve
deals mid-auction or postpone sales, drying up private equity
dealmaking with little hope of recovery any time soon.
In recent weeks, French retail group PPR postponed the sale
of its catalogue business Redcats, and industrial company
Schneider Electric SA (SCHN.PA) has delayed the roughly $1.4
billion sale of U.S. subsidiary Custom Sensors & Technologies,
according to people familiar with the matter. [ID:nL5E7KJ3D5]
"For private equity firms, debt levels are definitely
coming in and rates are going up, which makes the financing
more expensive," said Jeff Raich, managing director and
co-founding partner of investment bank Moelis & Co. "This
should limit the ability to pay."
Private equity-backed deal volume in the third quarter was
down nearly 30 percent to $53.1 billion from the same period of
last year, according to Thomson Reuters data through Sept. 22.
That is also 22 percent lower compared to the previous
So far in 2011, however, such deals are still up about 14
percent from a year ago to $175.2 billion, Thomson Reuters data
Take a Look on dealmaking [ID:nS1E78L1U0]
Graphic showing global mergers and acquisitions:
Reuters Insider interview with Barclays' Paul Parker:
Reuters Insider show on boutique investment banks:
Financing still remains relatively cheap for companies with
strong credit ratings. But private equity deals typically need
leveraged loans and high-yield bonds -- the riskier form of
lending that carries some of the highest interest rates and
often is among the first financing to be withdrawn when credit
When banks commit to deal financing in a volatile market,
they often put in place a lot of "flex," which gives lenders
the ability to raise a loan's interest rate as long as it stays
within a range agreed upon between the bank and the borrower.
"It's more week-to-week in the high-yield bond market and
that does create for private equity firms' difficulties in
valuing companies because the interest rate and the amount of
debt available to finance an acquisition could move within
short periods of time," said Christopher Ventresca, co-head of
North American M&A for JPMorgan.
"They have to feel comfortable that the permanent capital
structure is the one they have modeled and assessed in light of
the price they are paying," Ventresca said. "It does make it
harder to put those deals together during volatile times."
Spreads on debt that tightened in the spring widened over
the summer, making debt much more costly and making it almost
impossible for private equity firms to fund deals that meet
their return expectations.
Markets that have been spooked by concerns in the Eurozone
have been struggling to price 11.5 billion-euro European debt
on deals done before the summer, according to Thomson Reuters
LPC data, leaving underwriters facing potential losses.
"Nobody is going to underwrite anything today that is
meaningful in size because you don't know what the market is
that you are underwriting into," said Karen Simon, global
co-head of financial sponsor coverage at JPMorgan.
Volatile stock prices also make it harder for two sides to
agree on value.
One bright spot is that there is abundant capital available
for deals in the United States and Europe, which should
translate into more deals once stock markets and financing
conditions turn more favorable.
"For high-quality assets, there is a very strong bid in the
market because there is a significant amount of capital to be
deployed by private equity firms," Moelis' Raich said.
(Reporting by Simon Meads and Soyoung Kim, editing by Matthew