Executive Summary
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After unprecedented levels of deal activity in 2007, the descent into recession in 2008 and 2009 presented both challenges and opportunities for the buyout and private equity market.
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We have seen higher failure rates of buyouts as a consequence of highly leveraged transactions running into difficulties.
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Private equity-backed and larger buyouts appear less likely to fail than other buyouts. Secured creditors on average recover about 60% of their loans in failed buyouts.
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The increase in general business failure associated with recession introduces opportunities for buyouts to rescue and turn around these failing firms, with retail sector deals especially prevalent in recent years.
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Private equity firms can take advantage of the increased supply of failing firms provided that they have the necessary means (financial and management skills) to turn the businesses around.
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Private equity firms have been less in active in recent years in buying failed firms, although there have been some significant transactions.
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Buyouts of failed firms are disproportionately more likely to fail again than buyouts from other vendor sources.
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Debt buybacks have been employed to reduce debt burdens.
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Debt-for-equity swaps and covenant resets are a feature of the current recession.
The Buyout Market in Europe
The buyout market in Europe involves management buyouts and buyins of firms with or without the assistance of private equity. A management buyout is the purchase of a business by its own management, whereas a management buyin involves the purchase of a business by an external management team. Buyouts are economically very important in terms of business regeneration and survival in Europe and the United States. In the United Kingdom, buyouts account for about half of all M&A activity. According to the European Private Equity and Venture Capital Association (EVCA), investments in buyouts accounted for 79% of all private equity and venture capital investments in Europe in 2007. The buyout market in Europe reached a record €177 billion from almost 1,500 transactions by the end of 2007 (Figure 1). The UK buyout market was by far the largest contributor to this total, with €101 billion from 677 buyouts, with public-to-privates and secondary buyouts having a particularly high profile.
Note: Europe is defined here as Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.
However, following the boom that ended in 2007, buyout market conditions have been changing markedly. Both deal volume and deal value fell sharply in both 2008 and 2009 (Figure 1). As the recession began to bite, there was a rise both in failures of buyouts and in buyouts of failed firms. The private equity industry may struggle as investments fail or underperform, but potentially it can restore the balance by buying and reviving failing companies. The industry has survived despite the recessions of the past and, provided it can adapt, will survive the current recession.
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