A cold wind blowing across the Pond

From the latest blockbuster movie to the latest gadget such as the Apple XS, things tend to gravitate inexorably from the USA to The UK and Europe. Let’s hope however that this isn’t the case with the funding of corporate M&A and particularly leveraged buyout credit, which in the USA is showing signs of grinding to a halt, leading to a number of deals, IPOs and syndications being pulled, as highlighted by the FT over the weekend. 

Debt availability, particularly that available to filling the gap in private equity backed buyouts, is a vital ingredient for having a healthy M&A environment, as in bullish times typically more than 50 per cent of all M&A deals feature some element of private equity finance, whether they be the buyers or sellers on one end of the deal. For ten years now, since the financial crisis, the market has been helped by the low interest rates on debt, which has allowed a large element of “leverage” to be available from banks to be utilised to bridge the gap between what the private equity and management invest and what is needed to acquire the targeted asset, with the cash and profits of the business then being utilised to pay this down after the deal is done. 

In the USA, the era of low interest rates appears to have ended and with this, combined with a general tightening of financial conditions (indicating the appetite of the banks to lend unless it is very risk-free), this has had the effect of making that leverage finance very expensive and hence either unaffordable or making the PE bid unattractive. Additionally, for the inter-bank market, this has made the practice of banks funding acquisitions, followed by a “selling down” of some of that debt very difficult or impossible. A series of such transactions have apparently failed because of these conditions, where Barclays, Deutsche Bank and Wells Fargo are quoted to have been pulled out of high profile transactions for a combination of these reasons. 

The third element given for the downturn is stated to be increased market volatility. The irony of that is that Private Equity, as a funding solution, was invented to combat or take advantage of market volatility. Some of the best and most rewarding PE deals in past years have been achieved when markets are volatile so that good businesses can be backed to rise from the confines of larger or poorer managed organisations or where a new way to do things has been pioneered and with guidance can lead to mass adoption and a market shift. 

Let’s hope that UK bankers hold their nerve and do not react accordingly. The interest rates in the UK look set to stay relatively low for the foreseeable future and Brexit (and market knee jerk reactions) aside, business seems to be in relatively good shape and there seems no compelling reason to adopt similar lending restrictions in a lemming-like fashion.