European Private Equity Firms Seek Nontraditional Loans Amid Debt Crisis

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The New York Times
Friday, October 05, 2012

European Private Equity Firms Seek Nontraditional Loans Amid Debt Crisis

By MARK SCOTT

LONDON - As the sovereign debt crisis has slammed Europe, Cinven has had to get creative to finance buyouts.

When the London-based private equity firm wanted to buy CPA Global this year for $1.5 billion, Cinven looked beyond banks, the usual source of money. Along with debt from HSBC and JPMorgan Chase, it secured almost $200 million of higher-interest loans from nontraditional lenders. It also had to spend roughly $600 million of its own cash.

"The debt markets have been challenging since 2007," said Matthew Sabben-Clare, a partner at Cinven. "There's a degree of selectivity by the banks over geographies and certain industries. Banks are more regionally focused than before."

Europe's financial woes are forcing private equity firms like Cinven to revise their deal-making playbooks.

As banks pull back, private equity firms are increasingly turning to high-yield bonds, mezzanine loans and other types of debt that carry higher interest rates. Some are appealing directly to institutional investors like pensions and sovereign wealth funds to finance specific deals.

Given the tight credit, most firms are having to put up more capital to get deals done. Cash now accounts for more than 50 percent of the average European buyout, according to the data provider S.&.P. Capital I.Q. Five years ago, that number was 33 percent. In the United States, cash represents 38 percent of the average buyout, mainly because firms have access to a variety of financing options, like capital markets.

Private equity firms "are having to widen the net to find the loan financing they need," said Kristian Orssten, head of European high-yield and loan capital markets at JPMorgan Chase in London. "Many lenders in Europe are getting to grips with their own funding challenges."

The financing troubles for buyouts are reflected in the weak deal-making environment.

Although firms are raising money to buy distressed assets in Europe, many have remained on the sidelines as the debt crisis continues. So far this year, European acquisitions by private equity firms have totaled $23.2 billion, a 38 percent decline from the same period in 2011, according to Thomson Reuters.

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