Goldman Sachs: PE Firms Facing 2-Year Credit Drought

FRANKFURT (Reuters) – Global private equity faces a dry spell in takeovers for at least two years due to the credit market crisis and firms will need to innovate to survive, a private equity specialist at U.S. bank Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) said on Tuesday.

“We won’t get signs of a pickup in activity until 2010 at the earliest, maybe even 2011,” said Martin Hintze, Managing Director at Goldman Sachs responsible for its buyout business in German-speaking Europe.

“The private equity branch is in a correction phase after the bursting of the credit market bubble,” Hintze told Reuters on the margins of a financial conference.

He said banks’ reluctance to lend had made financing difficult even for deals worth less than 1 billion euros ($1.33 billion).

The credit crisis had also pushed down the potential selling price for companies, making it a poor moment for private equity to exit from their investments.

Private equity companies traditionally made money by taking over and restructuring companies, then selling them to other investors or floating them on the stock market at a large profit.

They borrowed most of the money they needed to buy a company, but that kind of funding has largely dried up.

Buyout firms were now likely to hold on to their corporate investments longer as a result, perhaps for five to seven years, rather than the previous horizon of two to five years, he said.

“There will be no more quick flips,” Hintze said, adding that the return on the equity capital invested by private equity firms in the short term was bound to fall below the average of 17 percent posted between 1997 and 2006.

Returns rose to more than 30 percent in the boom years 2006 and 2007.


The dearth of financing and jittery investors were leading private equity firms to seek new avenues to make money, with the focus now on non-performing loans, infrastructure investments, financial services and minority stakes, Hintze said.

“Desperation makes you innovative,” he said. “The classic credit-financed deal will not be on the agenda for the next six months.”

Goldman Sachs’s private equity activities will also focus on improving operations at the companies it currently holds in its portfolio, Hintze said.

In Germany, Goldman Sachs Capital Partners is invested in forklift truck maker Kion, building materials supplier Xella and specialty chemicals firm Cognis [COGN.UL].

Since the financial crisis broke out, private equity firms have been unable to carry out any deals over 10 billion euros, and the overall volume of credit available for buyouts has plunged by 87 percent in the third quarter compared with a year earlier, Hintze said.

The Goldman Sachs banker also predicted that there would be some consolidation among private equity firms before the market turns up again.

“There will be a process of selection. A few firms invested too much in the boom times,” Hintze said.
(Reporting by Jonathan Gould and Philipp Halstrick; Editing by David Cowell)