* Private equity houses unwilling sell boom-time buys
* Sales of Iglo Group, KMD and The Trainline pulled
* Buyers sitting it out, knowing dealmakers have to sell
* 40 pct of peak-time deals worth less than buyout firm paid
By Simon Meads
LONDON, July 18 Buyout firms are unwilling to
sell businesses, bought in the boom, at knock-down prices for
fear of missing out on big bonuses, creating a huge backlog of
unsold companies that threatens to choke the industry.
Private equity houses invested heavily in companies from
pharmacy chains to oil and gas explorers before the 2008/9
global financial crisis, using $2 trillion of capital supplied
by pension funds and other investors and cheap, plentiful bank
Having nursed those companies through the subsequent
downturn - by fixing ailing operations and restructuring
punishing debt - the private equity firms now find themselves in
Just when they should be preparing to sell the maturing
businesses to take profits and return money to investors, buyers
are calling their bluff. They know private equity firms will
have to sell eventually and are happy to wait in the hope prices
The resulting backlog of unsold companies is depriving
private equity firms of cash and piling pressure on the
industry, which some commentators have long said is due for a
"Is it right to say that some of the 25 biggest LBO
(leveraged buyout) firms should disappear? No doubt," said
Heinrich Liechtenstein, associate professor at IESE Business
School, at Spain's University of Navarra.
At the end of 2008, Liechtenstein in a report with Boston
Consulting Group drew attention to a bloated industry and
predicted between 20 and 40 percent of leading buyout firms
could go out of business.
Candover, once seen as a leading light in the European
buyouts industry and now in the process of winding itself up, is
a notable casualty.
Some firms, like BC Partners and Cinven
, that made a good run of sales and got capital back to
their investors have successfully raised new funds.
But others like Duke Street and AAC Capital UK, which
haven't shown good enough performance have failed in their
fundraising efforts this year. Meanwhile, Guy Hands's buyout
firm Terra Firma has delayed plans to raise new funds until
company valuations improve.
While deals for pharmacy chain Alliance Boots and energy
consultant Wood Mackenzie at high prices and high returns have
created a buzz, fragile debt markets and concern about the poor
state of Europe's economy are pushing selling prices down in the
majority of cases.
Private equity firms are waiting for prices to rise before
they sell because they could otherwise miss bonus targets, and
fail to show investors strong enough performance to justify
raising a new fund.
The auctions of frozen foods group Iglo, IT support business
KMD and online bookings service The Trainline have all failed to
result in a deal because offers have fallen short of asking
prices, people familiar with those situations said.
The gap between the price sellers want and what buyers are
prepared to pay may have even widened a little in recent months,
said Simon Tilley, head of the European financial sponsors group
at DC Advisory Partners.
"In that kind of situation we are just stuck and that's
basically where we are right now.
"It remains an environment where the very best businesses
still attract super prices and there are debt packages for that.
the ability for buyer and seller expectations to meet is
really only reserved for the top 5 or 10 percent of businesses,"
Some 40 percent of companies bought with money raised from
2004 to 2008 are worth less than the private equity group paid
for them, according to data from consultancy firm Bain & Co, and
70 percent are below a value that would allow dealmakers to earn
To get their bonuses, which can amount to tens of millions
of dollars and the performance record needed to launch a new
fund, bankers say buyout firms need to make about two times the
capital they invested across a whole fund.
But based on Bain's figures, only 20 percent of companies
are worth more than twice what buyout firms paid for them.
Worse still, some private equity firms say they need to sell
for at least three times, to compensate for other,
underperforming companies in their portfolios. And only around
10 percent of companies are worth that, according to Bain.
"Some private equity firms are telling me they can't sell
businesses for less than three times they paid for it because
[that company] has to support the rest of the portfolio," an
unnamed banker said.
With company sales in limbo, private equity investors are
cash-strapped. They have only got back 10 percent of what they
put into funds in 2006 and 2007, according to Bain, when they
should expect to have received more than half.
Firms may have to bite the bullet and sell companies for
less than they would like, forgoing bonuses - known in the
industry as carry or carried interest - to get capital flowing
in the hope investors will back them for another fund.
"If your fund is not in carry, it's not in carry and you are
better starting afresh," said Steve Conway, head of Citigroup's
financial entrepreneurs group in EMEA.
"There will be people who will sell deals just in carry or
even below carry to recycle capital and fight another day," he