KEY POINTS:
Private equity deals face a rough ride over the next few years but still have a long-term future, industry experts say.
Speaking at the Venture Capital Association's annual conference, ANZ head of specialised lending Mark Hiddleston said private equity deals had been hit hard by the credit crisis in the first half of 2008 and had fallen further since then.
"In the first half of 2006 there was $434 million spent in 54 deals. In the first half of 2008 it was $88 million on 35 deals. Nothing is being done at the top level."
Paul Dougherty, a partner with merger and acquisition experts Cameron Partners, said debt-raising levels had dropped back to where they were in 2004 when players could raise three to four times the ebitda of a company.
At the height of the private equity boom it was nearly double that.
Hiddleston said small amounts of money were still being raised but instead of taking two weeks it had blown out to six, eight and even 10 weeks.
That was causing other issues because the cost of the debt could change dramatically from 300 basis points to 375 basis points in that time.
Terms were also likely to change.
Hiddleston said that before March, deals were being done with just one term sheet and now there were cases of four lots of terms being presented.
Conditions were also being introduced in an unusual step.
Hiddleston said it was no longer just an issue of whether a buyer could raise debt but a question of how far the recession would go and what the impact would be on any company purchased.
"It's a bit like trying to clutch a falling knife."
Dougherty believed there were a number of issues. "The IPO markets are closed. Any exits at the moment are pretty problematic. At the same time banks are looking to deleverage so there will be problems on refinancing."
He predicted that could cause problems for private equity funds which bought in 2006/07 deals and had very high levels of debt.
"On the surface private equity funds just want to hunker down but they have got to be aware of what is happening by holding on to investments and that effect on internal rates of returns. The question is whether to sell your stars or your dogs."
But Catalyst Investment managing director Simon Dighton believed private equity managers would just hold on to their investments for longer.
He said the key issues were the instability in the banking system and a continued mismatch between vendors' and buyers' prices.
Dighton said there were plenty of cashed up private equity funds and past history showed global dislocations would create more opportunities.
"Yes, margins have increased materially but base rates have also come down."
Dighton said opportunities would come from an increasing number of assets coming to market in a distressed position.
He also expected to see more private equity funds pumping money into public companies, especially small and mid-sized ones.
Dougherty said the credit crisis would pass and eventually the recession fallout would plateau. "Private equity will come back in the longer term."
Taking a hit
* Private equity deals have plunged.
* The amount of debt able to be raised has halved.
* Recession fears are making businesses appear less attractive.
* More distressed sales are expected to come up.
