Buyout firms are unwilling to sell businesses, bought in the boom, at knock-down prices for fear of missing out on big bonuses, creating a huge backlog of unsold companies that threatens to choke the industry.
Private equity houses invested heavily in companies from pharmacy chains to oil and gas explorers before the 2008/9 global financial crisis, using $2 trillion of capital supplied by pension funds and other investors and cheap, plentiful bank debt.
Having nursed those companies through the subsequent downturn - by fixing ailing operations and restructuring punishing debt - the private equity firms now find themselves in a bind.
Just when they should be preparing to sell the maturing businesses to take profits and return money to investors, buyers are calling their bluff. They know private equity firms will have to sell eventually and are happy to wait in the hope prices fall.
The resulting backlog of unsold companies is depriving private equity firms of cash and piling pressure on the industry, which some commentators have long said is due for a shakeout.
"Is it right to say that some of the 25 biggest LBO (leveraged buyout) firms should disappear? No doubt," said Heinrich Liechtenstein, associate professor at IESE Business School, at Spain's University of Navarra.
At the end of 2008, Liechtenstein in a report with Boston Consulting Group drew attention to a bloated industry and predicted between 20 and 40 percent of leading buyout firms could go out of business.
Candover, once seen as a leading light in the European buyouts industry and now in the process of winding itself up, is a notable casualty.
Some firms, like BC Partners and Cinven , that made a good run of sales and got capital back to their investors have successfully raised new funds.
But others like Duke Street and AAC Capital UK, which haven't shown good enough performance have failed in their fundraising efforts this year. Meanwhile, Guy Hands's buyout firm Terra Firma has delayed plans to raise new funds until company valuations improve.
LOWER PRICES
While deals for pharmacy chain Alliance Boots and energy consultant Wood Mackenzie at high prices and high returns have created a buzz, fragile debt markets and concern about the poor state of Europe's economy are pushing selling prices down in the majority of cases.
Private equity firms are waiting for prices to rise before they sell because they could otherwise miss bonus targets, and fail to show investors strong enough performance to justify raising a new fund.
The auctions of frozen foods group Iglo, IT support business KMD and online bookings service The Trainline have all failed to result in a deal because offers have fallen short of asking prices, people familiar with those situations said.
The gap between the price sellers want and what buyers are prepared to pay may have even widened a little in recent months, said Simon Tilley, head of the European financial sponsors group at DC Advisory Partners.
"In that kind of situation we are just stuck and that's basically where we are right now.
"It remains an environment where the very best businesses still attract super prices and there are debt packages for that. the ability for buyer and seller expectations to meet is really only reserved for the top 5 or 10 percent of businesses," he said.
Some 40 percent of companies bought with money raised from 2004 to 2008 are worth less than the private equity group paid for them, according to data from consultancy firm Bain & Co, and 70 percent are below a value that would allow dealmakers to earn bonuses.
To get their bonuses, which can amount to tens of millions of dollars and the performance record needed to launch a new fund, bankers say buyout firms need to make about two times the capital they invested across a whole fund.
But based on Bain's figures, only 20 percent of companies are worth more than twice what buyout firms paid for them.
Worse still, some private equity firms say they need to sell for at least three times, to compensate for other, underperforming companies in their portfolios. And only around 10 percent of companies are worth that, according to Bain.
"Some private equity firms are telling me they can't sell businesses for less than three times they paid for it because [that company] has to support the rest of the portfolio," an unnamed banker said.
With company sales in limbo, private equity investors are cash-strapped. They have only got back 10 percent of what they put into funds in 2006 and 2007, according to Bain, when they should expect to have received more than half.
Firms may have to bite the bullet and sell companies for less than they would like, forgoing bonuses - known in the industry as carry or carried interest - to get capital flowing in the hope investors will back them for another fund.
"If your fund is not in carry, it's not in carry and you are better starting afresh," said Steve Conway, head of Citigroup's financial entrepreneurs group in EMEA.
"There will be people who will sell deals just in carry or even below carry to recycle capital and fight another day," he added.
This article is copyrighted by Reuters
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