The deepening economic crisis could see up to 40 per cent of private-equity firms go out of business within the next three years as their portfolio companies default on debts, according to an analysis by the Boston Consulting Group and Spain??s IESE Business School.
The study predicts that between 20 and 40 per cent of the world??s largest funds will fail. Their predictions are based on publicly available data for private-equity firms, portfolio companies, banks and credit default swap rates, and their own analysis of loan trading levels and default probabilities.
Multiples of earnings before interest, tax, depreciation and amortisation have collapsed, intensifying the negative outlook for the industry. Between 2003 and the end of 2007, multiples grew by 41 per cent in the US and by 43 per cent in Europe.
??Private-equity firms were able to earn a good return from this appreciation without having to improve their portfolio companies,? said Prof Heinrich Liechtenstein of IESE.
??But in 2008, the 45 per cent drop in valuations has changed the situation dramatically, pushing multiples below the level of the previous three to four years.?
The shakeout in the industry will also be driven by the next fundraising round. The climate for fundraising has already deteriorated rapidly as turmoil in the credit markets has forced investors to pull back sharply from the sector. The authors are also predicting rising defaults for buy-outs.
