* Buyout firms bid for public companies, corporate arms
* Deals between firms make up to 80 pct of PE deals - banker
* Meagre returns for investors
By Simon Meads
LONDON, Oct 17 Buyout firms are scouring Europe
for under-performing companies they previously shunned in search
of profits that could help improve returns for their investors.
Pressure to boost returns means these private equity groups
are prepared to look at potential buyouts that require more
homework and are higher risk and more complex.
This has already led to a rash of new deals, which unlike
the recent pattern, involve companies not already in private
equity hands. There is the prospect of more to come as big
European firms look to trim their sprawling businesses and
family enterprises consider whether to cash in.
"Our teams in France, Spain and across Europe expect good
deals coming from corporate sellers, in particular. That is
where we are spending our time looking," said a Europe-based
private equity executive.
The private equity sector has had a lean time since the
financial crisis because the flow of cash from banks that helped
finance billion dollar corporate deals virtually dried up.
Buyout firms typically buy underperforming companies to shake
them up to sell or float them at a profit.
Since the crisis, they have relied on doing deals between
themselves, passing on companies they own to other private
equity houses in what are called secondary buyouts.
But this has contributed to relatively meagre returns for
wealthy investors who put money into the industry's buyout funds
and pay millions of euros in management fees.
In 2011 and the first nine months of 2012, the largest
buyouts involved firms buying companies from each other in
auctions run by investment banks that corporate buyers avoided
and investors in public markets did not want. These included
Swedish alarms group Securitas Direct and German bandages maker
Deals between private equity firms account for 41 percent of
all buyouts in 2012, according to data firm Preqin. That figure
has been constant since it jumped from 26 percent in 2007.
But the proportion is possibly now much higher -- as much as
70-80 percent of mid-sized and large deals, according to one
banker who advises private equity firms.
A difficult climate for stock market flotations has also
contributed to the predominance of secondary buyouts.
It's a source of concern to investors, who were promised
returns of more than 20 percent a year, but instead have seen a
string of low-risk deals for high prices - and flagging returns
from their private equity portfolios.
Private equity has delivered a slim 1.2 percent return
annually over the last five years and a 5.4 percent return over
the last ten, according to Thomson Reuters data.
"No firm can go out and tell investors it is going to fill a
whole fund with (secondary buyouts). They need some new deals,"
the banker said.
Private equity firms are paying less now for companies than
before the financial crisis, with deals done at 8.1 times
earnings in 2012, compared with 9.8 times in 2007.
But fierce competition in auctions means they haven't fallen
as far as the industry hoped. The most attractive companies
still command double-digit valuation price tags.
This is driving some firms to hunt out cheaper companies
away from auction processes, where multiple bidders push up
prices. Instead these private equity buyers can be the first to
make cost cuts, improve efficiency and open new markets - and
potentially boost returns for investors.
In the last week, Bain Capital has agreed to buy Spanish
call centre business Atento from telecoms group Telefonica
, Cinven is buying generics pharmaceutical
business Amdipharm and PAI Partners has taken control of Italian
eyewear maker Marcolin.
And other deals are in the pipeline, with Carlyle
pursuing defence group Chemring and Advent International
launching bids for German retailer Douglas and Dutch
pharmacy chain Mediq, while Advent and Mid-Europa are
in the midst of a rare takeover spat for Polish supermarket Eko
These deals are more complex, showing how private equity
firms have to work harder to overcome multiple hurdles. In
Britain, for example, takeover rules make it harder to take
companies private. The uncertain economic outlook may make
businesses hoard cash and stick with non-core divisions rather
than sell. Entrepreneurs may be wary of selling out too cheaply,
private equity professionals and bankers said.
"There is a very big universe of private equity firms and
low deal numbers so they need to find new ways to make returns
work," said Tommy Erdei, managing director in the healthcare
investment banking group at Jefferies, which advised
Cinven on its acquisition of Amdipharm.
"PE firms are showing more caution and are drilling down in
their due diligence, but when they find something they like,
they are even more focused on getting the deal done."