Recently, RR Donnelley sought the assistance of Mergermarket Group to interview professionals in the US, Europe, and Asia-Pacific about leveraged buyout financing. Mergermarket Group published its survey results on the environment of leveraged buyout financing in its April 2015 edition of the Venue Market Spotlight.
Availability of buyout financing
A majority of survey respondents indicates that the availability of buyout financing will increase in the next 12 months. Specifically, 52% of respondents state that buyout financing will somewhat increase, while 8% of respondents believe that buyout financing will increase significantly. However, 32% of respondents expect buyout financing to decrease in the next 12 months, primarily because banking regulators have provided guidance that limits how much leverage financial institutions can extend.
Sector with greatest and least availability of buyout financing
26% of the respondents think that the Technology, Media and Telecommunications sector will see the greatest availability of buyout financing in the next 12 months because of the continuous innovations in this sector. In contrast, the financial services and energy sectors are the ones where most respondents, at 26% and 24% respectively, believe there will be least buyout financing.
Private equity firms – buyers or sellers?
The survey results indicate that private equity firms will do more buying than selling over the next 12 months, although the numbers are close. 40% of respondents say that private equity firms will do more buying, 32% say that private equity firms will do more selling, and 28% say that private equity firms will do an equal number of both.
Regions with greatest and least availability of buyout financing
Slightly over one-third of respondents believe that Latin America will have the greatest availability of buyout financing in the next 12 months. Rounding out the top three in this category are Asia-Pacific and North America. On the other hand, a significant majority of respondents (68%) believe that Europe will have the least availability of buyout financing over the same time frame.
Drivers and dampers of leveraged buyout financing
According to the respondents, the three biggest drivers of leveraged buyout financing over the next 12 months are access to cheap debt, a strengthening economy, and the availability of high-quality companies to purchase. One Europe-based vice president of finance believes that the access to low-interest rate debt is the biggest driver for buyout financing because it allows private equity firms to help companies improve performance while earning them high returns. Conversely, the respondents believe that the biggest hindrance to leveraged buyout financing is regulations that limit banks’ participation in buyout deals. In 2013, US banking regulators released guidance on leveraged lending that placed an acceptable leverage level at 6x total debt-to-earnings before interest, taxes, depreciation, and amortization. The regulators will more heavily scrutinize loans that exceed this level, which has caused financial institutions to stay away. Since banks are the most convenient source of funding, their restricted participation in leveraged buyout deals reduces leveraged buyout activity.
Overall, the future for private equity leveraged buyout financing is promising, as the majority of respondents expect the availability of this type of financing to increase.
The author would like to thank Bobby Leung, articling student, for his assistance in preparing this legal update.
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