October 1, 2007 | posted by Michael Baxter in IABN |

Last month it seemed that private equity had gone to meet its maker. Just two weeks ago, Guy Hands, the man behind private equity group Terra Firma, said in his quarterly newsletter: “The days of simply buying a good company, financing it well and enjoying a great return are over. The debt simply will not be there.” He added: “No longer will we put deals together in a few weeks; they will take months and possibly years.”

Private equity, it appeared, would be an early casualty of the new era in money lending. But what was that? Did it just move? Was that a twitch we saw? Maybe it’s not dead at all, maybe it really was merely pining for the Fjords.

It does seem a little ironic, but Northern Rock, Britain’s highest profile victim of the liquidity crisis, is being circled by private equity companies: the very firms you would have expected to be chasing their tails right now.

Two American funds, JC Flowers and Cerberus, are said to be in the running for buying the bank. You may recall Cerberus. It’s the same firm that has been struggling to rustle up the readies for the purchase of Chrysler. Back at the end of July, when the first whiff of a credit crisis hit the press, Cerberus found itself in the headlines, with the media speculating that its problems raising the money for Chrysler was an omen of troubles ahead.

Well, we now know the prophecies of doom were right, and yet private equity seems to be bouncing back.

Take another example. EMAP is at the centre of a bidding war right now. It seems inevitable the business will be broken up; competition rules seem to make a merger with another media company impossible. So it may well be sold in chunks, and, according to yesterday’s Telegraph, private equity firm Vitruvian Partners is said to be backing Phil Riley, former chief executive of Chrysalis Radio, in the buyout.

The Telegraph said that private equity has its eyes set on the professional publishing arm of EMAP too.

This morning, the FT said that investment banks are still happily lending money to private equity operating in the mid marker. That means deals worth less than half a billion euros. The Pink’n said that since the end of September there have been 243 deals falling into this category, worth a total of 15.3 billion euros. The FT quoted Robert Rayne, chief executive of LMS Capital, as saying: “At our end of the market we are not seeing any real difficulty in raising finance.”

And while private equity proves a lot more robust than many had expected, Gordon Brown turned his attention to that chestnut from earlier this year: the tax breaks enjoyed by the industry of leverged buyouts. He told the Labour conference in Brighton: “Private equity will be dealt with in the Pre-Budget Report. I can assure you that we will do so.” He added: “That matter will be looked at in a few days and weeks, and wherever there is a loophole that there should not be, we will take action. I may say that since 1997 we have closed a massive number of loopholes where they exist. Sometimes it is very difficult to do so because there are lawyers and accountants who are always trying to find loopholes.”

Mr Brown has to tread carefully. For small burgeoning businesses, the ability to offset profits against interest is essential for their very survival. Entrepreneurs benefit from capital gains taper relief too. Should they kowtow to union wishes, and clobber private equity, Gordon Brown and Alistair Darling also risk penalising the very people they want to promote: entrepreneurs - the wealth creators of tomorrow.

As for the demise or return to rude health of private equity, just remember that company valuations are still near to their lowest levels in over a decade. This means businesses are cheap, even if credit is harder to come by. There is much scope to make business more efficient too, so there is plenty of room for private equity to work its magic and create new profits from thin air. As we have speculated before, it seems possible that private equity will borrow less in the future, and will instead raise money from abroad, especially from China and the Middle East. And in this age of ever growing competition from abroad, it’s even more important that our business is efficient.If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

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