Master the next buyout wave: European private equity outlook 2008

In summer of 2007, business for European private equity (PE) companies came virtually to a standstill. In contrast, 2006 was a record year in which the industry's investment volume increased by more than 50%. The reasons for this dramatic decline can be found in the after-effects of the financial market crisis, expectations of stagnating economic growth, rising interest rates and an increasingly tougher stock market. All of these factors will continue to pressure the market for years to come.

For PE companies, strict restructuring actions for the companies they buy are currently a key success factor. Experience from the USA shows that integrating the PE company into management can achieve an ROI of about 65%.

The lack of confidence caused by the US real estate crisis is hobbling the market. Holding companies must therefore finance their projects themselves to a larger degree, meaning that deals will become considerably smaller or not take place at all. Furthermore, investments will be made much more conservatively. The focus will remain on late stage buyouts, with start-up and expansion financing moving out of the spotlight. In Austria the share of buyouts is also rising sharply (2005: 13%, 2006: 40%), yet is still far below the European average. Due to the large amount of money on the market, the pressure to make suitable investments was already rather strong, even before the market crisis. Especially in small markets such as Austria, it is very difficult to find suitable takeover candidates.

Because interest rates continue to climb, PE companies now have to generate higher returns to cover their loans. The companies they invest in could themselves run into problems with negative equity. In addition, lower growth rates are expected on the stock markets in 2008, making the environment for exits less attractive.