Rate rise will make life a bit harder for private equity mega deals ::

Author: Stuart Washington
Date: 09/08/2007
Publication: Sydney Morning Herald

IT WASN'T quite "Here lies the private equity mega-deal. Rest in peace", but yesterday's 25 basis points interest rate rise did not help the cause of private equity.

The Reserve Bank yesterday confirmed rates were on the way up after a month in which roiling debt markets and rising interest rates have already substantially affected private equity deals, hedge funds with exposure to debt instruments and debt-sensitive investment banks. So it is hardly news that rising interest rates will make the job of private equity a little harder when it comes to raising finance for the next deal.

"Today is corroborating what was already in the wind," the chief executive of the Australian Private Equity & Venture Capital Association, Katherine Woodthorpe, said yesterday.

And the weight of the debt market issues is more likely to be felt in the private equity mega deal, in which private equity seeks to buy assets of more than $1 billion.

"They are more likely to be the one that feels the full effect ofthe wider repricing," Dr Woodthorpe said.

Again, this has already been seen in the departure of five private equity funds - Carlyle, CVC, Texas Pacific Group, Pacific Equity Partners and Permira - due to being unable to nail down funding during the bidding for Coles.

Broader problems in debt markets have been demonstrated by the failed syndication of #5 billion ($11.8 billion) in debt from the Kohlberg Kravis Roberts buy-out of British retailer Alliance Boots last month, and the effect of subprime mortgage defaults on hedge funds such as Basis Capital and Absolute Capital.

Uncertainty about the impact of a rate rise on the business model of investment banks, that raise debt to purchase assets and spin them into their funds, has been reflected in falls in the share price of Macquarie Bank, down 19 per cent to $79.49 from a high of $97.10, and Babcock & Brown, down 25 per cent to $26.05 from its high of $34.63.

However, the demise of the business model of private equity and investment banks was not likely, despite the uncertainty in the debt markets.

"The main point is that Babcocks and Macquarie Bank are born out of debt. They grew up on debt. They were founded on debt. They know it better than anyone," the chairman of Clime Capital, Roger Montgomery, said yesterday. "I don't think this will worry them at all."

Of private equity, he said: "It doesn't mean the deals are dead. It just means they have to be done at more rational prices."

An associate professor at the University of NSW's school of business, Frank Zumbo, said the interest rate rise was "touching the brakes; having a reality check" on the previous tactics employed by private equity.

Back to articles...