Where is private equity today?

Just a year ago, private equity funds were the engine of the M&A market and the scourge of the Csuite, but that activity has waned.

“Today, the state of the debt market is impacting public companies in their M&A activity and private equity firms looking at any transaction,” says Michael Nowlan, CEO of Marketwire. “We’ve seen the devaluations in the financial sector and a corresponding unwillingness, or at a minimum a significant tightening in the willingness, to lend money.”

But according to Harold Chataway, partner at Gowlings, it is important to view the private equity boom and bust in a larger context, as part of the series of cycles that began during the 1980s.

“Twenty years ago, acquisition strategies were, by today’s standards, relatively unsophisticated. That changed with the development of the junk bond, which allowed private equity firms to apply even more leverage to their transactions.


The KKR acquisition of RJR Nabisco was a benchmark in terms of size, value, types of financing of capital, acquisition speed and velocity – all the things we’ve begun to take for granted. What invariably happens, however, is that things get charged up too much. That happened in the late 1990s, and it happened again in the last couple of years. It was never a question of if the party was going to end, but when.”

The result is that acquisitions valuations are down, and with the exception of a few sectors, so are the number of deals. “There are not a lot of good companies for sale today that are traditional private equity targets. The buyer perception of value is down, and the sellers have not adjusted to it. It’s just generally not a good time to sell a company, unless you have to,” says Stephen Donovan, partner at Torys LLP.

In the current environment, says Mr. Chataway, there also aren’t a lot of exits for private equity firms. “For instance, there are no IPOs being completed of any consequence on the public markets relative to previous years.”

A number of the transactions being looked at, says Mr. Donovan, are in the realm of distressed investing where a parent or sister entity of a good company is in distress. Private equity buyers generally avoid distressed companies themselves. “Court process can be very lengthy, and the results of the process uncertain.”

Private equity buyers could spend a lot of time and money, and not end up with the business, so they tend not to be interested, he says. “The exception is when a private equity buyer really knows the market space. They may have other healthy companies operating in very similar environment; they think they understand what the fix is, and they could buy in at very good prices.”

“It could be three to six months or as much as a year before it starts coming back,” says Mr. Chataway, referring to the private equity activity seen prior to the debt crisis. “During that time period, strategic buyers have more of an upper hand.”

Whatever the timeframe, private equity will inevitably swing back into action, and for the corporations that will be among the next wave of acquisition targets, maximizing shareholder value then means maximizing perceived value today. “That hasn’t changed with the state of the financial market,” says Mr. Nowlan. “Look after the fundamentals of your business, ensure that you’ve run as profitable an entity as possible, and in that process, ensure that you are communicating openly and effectively with your shareholders…ensure the market, ‘the Street,’ your investors and potential investors fully understand what your strategy and challenges are and how you’re handling them. That will allow them to make the most informed decision on the value for your company.”