PE houses will need £1bn of debt, says Grant Thornton

PRIVATE equity groups will need to raise more than £3bn of debt to fund new deals in the UK this year, according to Grant Thornton’s latest Private Equity Barometer.
 
The quarterly survey of more than 100 private equity executives in the UK also shows that 63% of respondents expect to see an increase in the volume of new investments in the coming 12 months, with respondents expecting valuations to drop significantly.
 
Only 33% believe deal volumes will stay the same, while less than 4% predict a decrease.
 
Ian Marwood, a member of Grant Thornton’s lead advisory  team in the North, said: “A growing number of private equity groups are shifting their focus from portfolio management and exits to making new investments. They are keen to take advantage of an expected drop in valuations in 2011.”
 
Over the last quarter private equity groups have significantly lowered their views on valuations for 2011 in all sectors with the exception of high technology and healthcare, with healthcare remaining the same and high technology rising 18% to 7.7 x EBITDA (Earnings before interest, tax, depreciation and amortisation).
 
Respondents expect to see the largest drop in valuations of companies in the materials and chemicals sector with multiples falling 18% to 5xEBITDA in 2011, from the 6.1 x EBITDA predicted in Q3. Expectations for media and communication companies decreased by 13% to 6.8 x EBITDA.
 
Against this backdrop, private equity firms are preparing to invest in new opportunities using debt and equity, the survey found.
 
In terms of portfolio performance, the survey shows that more than 55% of respondents expect their portfolio companies to meet targets over the next 12 months, while nearly 30% expect targets to be exceeded. Only 15% expect their portfolio companies to slightly fall short of targets.
 
In terms of refinancing, 41% of respondents apparently do not need to refinance any portfolio companies in the next six months, while a further 40% need to refinance less than one in every 10 companies. By contrast, only 5% of respondents concede that they need to refinance more than a quarter of their portfolio and 14% need to refinance between 10% and 24%.
 
Mr Marwood: “A focus on the investment portfolio over the last couple of years is yielding fruit for private equity firms as there is significantly more stability in portfolio company performance and the trickle of exits is now turning into a more sustained flow.”