ONE of the UK's most successful venture capitalists, Jon Moulton, said the contribution of equity into buy-outs deals will continue to rise. Addressing the biannual Corporate Finance International (CFI) conference in Newport, Mr Moulton said in value and volume terms leveraged buyouts in the UK, as in the rest of Western Europe, had effectively fallen off a cliff in 2009. He showed his audience that in 2007 leveraged buy-out deals across Western Europe were worth around É140bn, but last year they came in at under É5bn. On the outlook he said more equity would go into deals.
Last year equity contribution into all buy-outs exceeded 50%, where in 2007 -when leveraged buy-outs were at their peak – it was just over 30%. He said: "The number of and value of deals has dropped quite dramatically. That is a process that results in quite ludicrous economics, but that is the world as it is now." On the UK's massive gross debt, which he said was around 80% of GDP and growing at a faster rate than almost all developed countries apart from Ireland, Mr Moulton said: "Greece's debt may be bigger than the UK, but it is growing at a much slower rate than ours. "Economies with a public sector that represents 50%, like the UK, just cannot grow quickly, that's a fact. We need to shrink the sector.
"There also needs to be between pounds 50bn and pounds 70bn taken out of public spending. This can either be because of good politicians with the nerve to do it or because the debt doesn't vanish. "You can't help a heroin addict get off heroin by giving them more heroin. I just don't understand the cheerfulness of the markets, because these are huge numbers and they are just getting bigger." He said more companies would have gone into liquidation, but were able to avoid going to the wall because of historically low interest rates.
However, although buy-outs dropped to record levels in 2009, he said there was some positive news in that in the last quarter of the year the volumes of deals picked up. He said equity will become increasingly more popular in acquisitions. Mr Moulton added he was certain that interest rates would start to move upwards and that banks would remain credit constrained. Mr Moulton's new private equity venture Better Capital last week acquired Reader's Digest. On the deal he said: "It is going extremely well.
It is fundamentally not a loss-making business." He said that all costs in the business were being looked out, including property. He was confident that the return on the investment would be "substantial". Geraint Rowe, partner at Gambit, said: "Jon's unique and candid analysis of the current merger and acquisition and debt market was very thoughtful and incisive. Clear opportunities do exist in the stressed and distressed market where focus is on operational and financial gains.
"These opportunities will increase when the inevitable interest rate increases are seen in the next few quarters of 2010 as a result of an economic upturn. The relative 'protection' of low interest rates to highly geared companies will be removed and debt default levels inevitably promote turnaround opportunities."