By Brian Livingston, Head of Private Equity at Smith & Williamson

In the summer of 2010 we conducted our second private equity (PE) survey. 102 PE executives at 67 different mid-market (£5m-£50m) PE houses responded.

The survey results confirm the fact that relationships are increasingly important. Aligning the company’s interests and needs with those of a PE house and a bank has become ever more complex. Some PE houses are investing, but not in all sectors. Equally some banks are lending but not to all companies. And not all banks will deal with all PE houses.

Nearly half of the respondents believe that the number of PE houses will fall significantly over the next two years. However, almost three-quarters of those surveyed are confident about the outlook for their own fund for the next year, suggesting that their concern is for others in the community.

Regulation, regulation, regulation.

There is clear negative sentiment in the Private Equity community over increasing politically-inspired regulation and only 4% believe that examples, such as proposals for greater transparency and disclosure, will not increase in the year ahead. For instance 54% of those surveyed agree that the AIFM Directive will have a severe impact on the Private Equity industry.

Just over half of respondents believe the lack of funds being made available to SMEs is having a detrimental effect on the PE community, while approximately two-thirds believe that tax breaks to encourage investment are desperately needed.

Bank debt — a lottery?

While only 23% felt that it hadn’t been easier to raise debt finance this year than last, two-thirds anticipate that more PE-backed businesses will breach their debt covenants in the current year. Half of respondents reported that, to date, banks have generally not acted helpfully when covenants have been breached.

When asked to nominate the most active bank for lending over the last year,various PE houses put forward RBS, HSBC, Lloyds, Clydesdale/Yorkshire, The Co-Op and other,non-traditional sources. The fact that no one bank is dominant in lending once again highlights the disparity of opinion and experience.

Competition for scarce transaction opportunities

2009 completed transaction numbers appear to have dropped even from 2008 levels. However, almost half of respondents believe that completions in 2010 will be higher.

Finally, opinion is divided almost evenly as to whether entry price expectations have become more reasonable since the credit crunch or whether entry multiples will change significantly this year.

For more details on these results, or to discuss raising finance or selling your business, call Brian Livingston on 020 7131 4914 or email brian.livingston@smith.williamson.co.uk

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