Focus: Private Equity – Say hello to good buyouts

Raymond ­McKeeve

Just as one swallow does not a summer make, the arrival of two deals does not signal a full-blown recovery. But there are ever-louder whispers that the two major private equity transactions to close at the tail end of last year could – possibly – trigger a resurgence in the ­beleaguered buyout market.

Although it is small fry compared with the heady days of 2006, EQT Partners and the Singapore ­Investment Corporation’s £2bn ­purchase of Springer Science and Business Media in December, ­coming on the back of Apax Partners’ £975m takeover of pharmaceutical logistics company Marken, have been seized upon in some quarters as evidence of green shoots.

Coming out of hibernation
The magic circle trio of Allen & Overy (A&O), Clifford Chance and ­Freshfields Bruckhaus Deringer snapped up roles on the Springer deal. A&O was there again, along with Ashurst and Travers Smith, on Apax’s purchase of Marken – the UK’s new post-Lehman ­Brothers ­collapse high-water mark in terms of buyouts.

Having twiddled their thumbs for the best part of 12 months, private equity partners at City firms have been licking their lips at the prospect of their erstwhile clients dusting off their address books.

“The phone’s been ringing off the hook here,” says Ashurst corporate head Stephen Lloyd. “There’s been a massive change in attitude from just a few months ago. Some money became available again towards the end of last year and there’s new debt starting to open up again.”

But others are less bullish about the return of the private equity ­houses.

“I’m sure there’s been a lot of ­talking, but I don’t know how much action we’re actually going to see as a result,” says a senior partner at a top 10 firm. “There’s more likely to be exits than buyouts.”

Furthermore, the evidence ­provided by Thomson Reuters’ monthly M&A deals ranking for December (see table) does little to support the feeling that private ­equity has returned in the way many firms might want to see. Of the top 10 ­global transactions, only the Springer deal registers, although even that marks an improvement against the first half.

A look at flotations could tell a more optimistic story, with a recent Standard & Poor’s study listing as many as 15 IPOs sponsored by ­private equity firms mooted for the first quarter of this year.

Freshfields corporate partner David Sonter, who acted for Springer on its buyout, is one who thinks that the bigger houses will want to get out of their commitments before they wade in again.

“Most of the excitement for ­private equity will be in IPO exits in the first half of this year,” he claims. “If the pipeline deals get away you’ll see a flood of them, driven by buoyant equity markets.”

But even IPOs may not be as attractive as some would have you believe. US private equity house ­Hellman & Friedman reduced some of its exposure to the Gartmore Group through a £250m IPO in December, but the market did not bite as expected, with shares initially trading below an already lowered offering price.

So the question remains as to whether the newly buzzing phone lines will result in a flow of work for private equity practices and, if so, which firms will reap the ­benefits.

Seeing other people
Even more than other business areas, private equity has traditionally been based on individual relationships. But these could soon be changing.
“There’s been a generational shift that’s brought in new, younger guys,” says Berwin Leighton Paisner ­private equity chief Raymond ­McKeeve. “Coupled with clients ­moving to other private equity ­houses there will be opportunities to develop new ­relationships.”

McKeeve himself boasts an impressive roster of houses on his client list, and with Apax, the ­Blackstone Group, Montagu and ­Permira all among those expected to show some activity, it looks like a busy 2010 for the ­former Kirkland & Ellis dealmaker. But he sees work being spread around as sector ­expertise becomes more important.

“Our hope is that there will be a new trend in how private equity firms choose their advisers,” he adds. “The generalist approach is dying, as clients will expect their advisers to help de-risk investment decisions. It will be more sector-driven. Firms need to provide sectoral expertise.”
But another City partner with a healthy list of private equity clients disagrees.

“The houses still care more about relationships than sectors,” he ­counters. “I’d be surprised to see much of a spreading out of work or a horses-for-courses approach.”

What is certain is that there are a number of private equity houses with money that has been sitting dormant for too long, while others are tooling up for a fresh tilt at the market.

BC Partners is currently in the process of raising around £5bn for buyouts, which will spell good news for Dickson Minto, its longstanding legal adviser. The house is also likely to be one of the more active in terms of exits, with flotations planned for Amadeus, Medica and German chemical distributor Brenntag.

And the return of BC is as good a sign as any that something is ­stirring in the private equity arena.

“They were perceived to be one of the firms to have suffered most,” says a ­corporate partner at a top 20 firm. “If they can start doing it, anyone can.”

Apax could also have some cash to invest in the second half of the year, with three major IPOs rumoured to be in the offing.

The largest of these, the e9bn (£7.8bn) Danish ­telecoms operator TDC’s, would also produce a windfall for fellow owners ­Blackstone, KKR, Permira and ­Providence Equity Partners.

And whichever way the market goes, that new capital needs to be reinvested somewhere, at some point.

“The Springer deal shows that, for the right deals, there is debt capacity,” says Sonter. “Debt evaporated in ­September ‘08 and started coming back in September ‘09, but it’s still scarce and more complex to put together larger debt packages.”

Mixed bag
One thing that capital markets lawyers seem to agree on is that this new debt landscape is the big hurdle to any renewed M&A
activity.

“It’s the real problem,” agrees the City partner. “Investment banks are still not underwriting debt in the ­traditional sense and they’re not about to start behaving in the same way as two years ago.”

What this means is that, even if deals do start to take off again, they will need larger banking syndicates, take longer to close and are likely to be more costly. In turn, private ­equity practices will not return to the glory days of the last decade.

Latham & Watkins M&A partner Graeme Sloan views the private ­equity landscape as “a mixed bag” in 2010.

“The fact that the high-yield ­market is open has led to some ­activity at the higher end as there is debt available for the larger deals,” he says. “However, it’s more that there’s the ability to do deals rather than a guarantee that deals will actually get done. Lots of people have been ­working on things and others have been waiting to see if valuations are going to drop. It’s nice to see things being done, but you need a lot more to be defiantly optimistic.”

Lloyd at Ashurst agrees that a return to the “crazy market” of 2006 is unlikely, but is confident that the deals are returning.

“We knew it would come sooner or later because they have to spend the money at some point,” he says. “In a sense, they were all just watching and waiting for each other.”

Such optimism may not be shared by all of Lloyd’s peers, but there are plenty of City lawyers hoping ­December’s trickle soon becomes a flood.

M&A DEALS FOR DECEMBER 2009

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