LONDON (Reuters) – Private equity firms’ prime objective over the next year should be maintaining the health of their portfolio companies, Charles Sherwood, a partner and board member of European buyout house Permira, said on Tuesday.
“The top priority [for senior partners] would have to be protecting value in portfolio companies and if it isn’t then I think they need to change their medication,” Sherwood told the European Private Equity Insight Forum in London.
Issues such as when leverage might return to the market or if banks will lend to private equity at the same levels as before were of secondary importance, he said.
Private equity activity boomed in 2006 and early 2007, but following the credit crunch large leveraged buyouts, such as the record 11.1 billion pounds ($16.78 billion) KKR-backed takeover of Alliance Boots, have ground to a halt as private equity firms have found debt funding virtually impossible secure.
Sherwood said it would be very difficult to find any equity value left in deals done at the peak of the market, particularly in the retail and leisure sectors. He said firms would need to work “night and day” to restore value to portfolio companies and position them for the upturn.
“Three quarters of the acquisition price was some form of debt or fixed income security. It is stretching credulity that those valuations can be kept at cost of gearing under any semblance of fair value accounting,” he said.
“It will require a mathematical miracle, or mathematical fantasy.”
Nigel McConnell, managing partner at mid-market buyout specialist Cognetas, said private equity firms needed to focus on four things over the coming year: calls, capex, cash and covenants.
He added: “The big issue is not if we are going to experience recession in 2009, it is how long will that recession last for.”
Yves Alexandre, head of private equity for Europe at Investcorp, said all his portfolio companies are factoring in negative sales growth in the region of 10 percent and are adjusting their overheads and capital expenditure accordingly.
“This will have another impact on the economy; we know that and we are very concerned about that,” he said.
By Simon Meads
(Editing by Andrew Macdonald)