Deloitte: Private equity funds in the hunt for low-priced "gems"

The Deloitte Private Equity Confidence Index showed some much-needed optimism among private equity professionals as it rose 30 points from its low point of six months ago, indicating early signs of M&A recovery in the Central Europe (CE) region. The future economic climate, however, still remains a major concern.

“Governments and central banks have taken unprecedented actions to stimulate recovery, and the recent rallies in the stock markets around the world suggest the efforts are restoring confidence,” said Garret Byrne, M&A Transactions Services leader for Deloitte in Central Europe.

“This report substantiates these signs, indicating that — although deal flow and debt availability are likely to remain subdued for some months — people are again prepared to consider a positive response to opportunity.”

A picture emerges from the survey of a private equity profession reflecting the improved optimism felt in Western Europe and the US, but that cannot as yet commit to a revived M&A landscape in CE despite the view of many that the region will fare better than others affected by the global economic downturn.

According to the survey's respondents, the CE M&A market is still in a deep freeze. However, they expect any further decline in market activity to cease, with only 19% of respondents anticipating falls — a significant change from the 80% of six months ago. A clear majority (65%) of respondents expect market activity to remain unchanged during the next six months.

“Central Europe still provides prime assets,” said Byrne. “Secondary wave privatisations are still coming to the market, and valuations remain attractive compared to their West European counterparts.”

While the last six months have been sluggish for M&A professionals in CE, there are therefore signs of a shift in focus from day-to-day portfolio management to encompass once more the search for and analysis of new investments, an early sign of a recovering market.

Additionally, the survey suggests that private equity players are more bullish, with 76% seeking to invest more in the upcoming period, a rise from 66% in October 2008. The search for the low-priced "gems" in distress will be the key agenda item for most private equity players during the remainder of 2009.

Alongside these positive findings, more than half (51%) of respondents expect further economic deterioration in the next period, while 43% expect conditions to remain unchanged. “While at first sight this is not a positive finding, it is a significant improvement from the overwhelmingly pessimistic position of late 2008 when 92% expected the situation to get worse and not one respondent anticipated improvement,” said Byrne.

The main question being discussed by the region's finance professionals is whether the market has we reached the bottom. “Ultimately only time will tell, and with confidence still remaining subdued it may to too early to call the revival of M&A activity, but based on the weight of opinion it appears that we may have reached a bottom and the worst may now be behind us,” he said.

Key findings:

• The consensus view as at April 2009 shows much higher levels of optimism compared to October 2008, with the index gaining 30 points.
• Concern about the economic environment still exists, with 51% of respondents still expecting further economic deterioration.
• Going into the next period, respondents expect to split their time roughly equally between existing portfolio management and new investment activities.
• Expectations regarding return on investment are more bullish, with the proportion expecting improvement increasing from a record low of 5% in October 2008 to 19% in April 2009.

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