Distressed companies, tempting targets for dealmakers

Full speed ahead for recovery

After reaching an all-time low at the end of 2008, Deloitte’s Central European Private Equity Confidence Index has rebounded, with data indicating that professionals are optimistic about private equity coming back on track.

Within the 14th edition (October 2009), confidence is shown as returning to almost pre-crisis levels and findings highlight that only a small minority of PE practitioners now expect the economic environment to deteriorate further.

The decline in the CE PE Confidence index during the financial crisis was sharp and deep, decreasing by 70 points from 118 in October 2007 to 48 by October 2008. The recovery in confi¬dence, however, has also rebounded equally as sharply, recovering 69 to 117 by October 2009.

“Optimism is growing amongst the private equity community in Central Europe. The results of our latest Private Equity Confidence Survey show that just as the decrease in confidence was dramatic, the return of a more optimistic outlook has been equally as swift”, said Garret Byrne, M&A Transactions Services leader for Deloitte in Central Europe

PE funds looking for cheap assets

Private equity professionals are expressing far more optimism about the overall economic climate in the next six months, with an expectation of a return to growth. Only a small minority of PE practitioners expect the economic environment to deteriorate further, while a significant proportion of respondents said they expect that the economies of Central Europe will outperform those of Western European countries.

“In Romania as well we are definitely seeing a strong private equity investors’ increase of interest in the existing sell-side mandates. Well-managed businesses with solid fundamental prospects remain attractive as investment opportunities. With the right investment partner, such businesses will be able to emerge from the downturn stronger,” said Hein van Dam (photo), Partner in Charge Financial Advisory Deloitte Balkans.

Despite high confidence among professionals about the recovery prospects of PE and the Central European region, it has been impossible to ignore the ongoing effect of the global financial crisis. “Negative impacts of the financial crisis will continue to be felt,” added Byrne. “Debt markets are still restricted and in the short term we expect there to be continued fall out with some of the weaker companies that have been less responsive in tackling the crisis failing.”

Frozen debt markets are still inhibiting M&A activity from resuming, with few respondents expecting that the situation will improve in the next six months.

While the number of Central European companies entering bankruptcy or insolvency proceedings has increased, some funds are seeing opportunity in this environment of corporate adversity. Distressed companies and companies in restructuring are becoming important targets for deal makers that want to buy assets cheaply and have the appropriate risk appetite and mandate to do so.

Highlights of the survey

Economic Climate
The overall economic climate is expected to rebound over the next six months and return to growth. Over 90% of respondents expect the economy to stabilize or improve.

Debt Availability
Even though overall prospects are improving, financing and debt markets are expected to remain inhibited. The proportion of respondents seeing an improvement is steadily increasing.

Investors’ Focus
Private Equity investors are expecting to move away from portfolio management to concentrate on new investment. Fundraising is off the agenda reflecting a high level of existing funding in place.

Size of Transaction
Limitations of debt markets will hamper leveraged buyouts, as such private equity professionals will continue to focus on midsize targets.

Market Activity
After a period of stabilisation PE professionals expected M&A market activity to improve.

Investment Return
An improving overall economic climate and reinvigoration of M&A markets will provide a favourable environment for private equity funds to generate higher levels of returns on their investments.

Investors’ Activities
Most of the respondents display an inclination to buy more, which is consistent with the expected improvement of market activity.

New Investments Competition
Market leaders will remain the most desired target for PE funds in CE.

Interest Focus
In the current economic environment, distressed companies and companies in restructuring are becoming important targets for deal makers with almost 40% of respondents viewing such companies as interesting.

Development of GDP
A significant proportion of respondents expect that the economies of Central Europe will outperform those of Western European countries.