The Secured Lender - March 2010

“There is still in excess of $1 trillion of capital committed to alternative investment funds sitting on the sidelines, waiting for the appropriate opportunities. The diversified private equity players have been bulking up their debt, hedge and distressed funds to take advantage of opportunities in distressed companies reflecting their ability to evolve and successfully navigate choppy waters,” said Greg Peterson, Partner with PricewaterhouseCoopers Transaction Services.

Regarding private equity exits, “we expect to see more IPOs coming to market in 2010 from private equity as the markets continue to firm up,” noted Peterson. More the half of the IPOs completed during 2009 were by financial sponsor-backed (primarily private equity) companies, a trend expected to continue through the remainder of 2009 and 2010.

“Financing is the main factor contributing to the instability of middle-market deals. With so many traditional sources of lending now unavailable, including the rapidly increasing number of banks being shuttered by the FDIC, it remains a challenge for some companies and dealmakers to find capital,” continued Peterson.

The divestitures market will also
be a factor in fueling deals, as more
companies decide to rid themselves
of holdings they don’t consider to be
part of their core business. A recent
PwC Transaction Services survey, “Do-
ing Divestitures in Difficult Times,”
concluded divestiture activity was
poised for a higher level of activity
in the next 12 months, especially
among corporate buyers. Of the survey
respondents, 69% anticipate similar
or increased divestiture activity in the
coming year. The percentage of M&A
activity contributed by divestiture
transactions has begun to increase
in recent months, suggesting this is
already taking place as 2010 quickly
approaches.

FInance

◗;Consumer;Products— As retailers continue to pressure margins and growth through private label strategies, consumer product companies are accelerating trade spending at the expense of margins. Watch for high-profile combinations as branded companies look to gain scale and negotiating leverage with retailers, while enhancing their scale to drive productivity. A focus on high-growth categories and emerging markets will also be in vogue in 2010.

◗;Technology— The headline transaction of the past year—transformative deals—will continue as the battle over the data center and end-to-end services continues to drive the larger players. The large, mature players will also continue to absorb smaller companies who provide intellectual property that can be leveraged—at an array of multiples—as some will be seen as desirable by multiple players and others are made attractive by a higher bar to access in the public markets. At the other end of the scale, there is more consolidation to come amongst weaker players, especially in semiconductors.

◗;Energy—;The opening of the capital markets window (both debt and equity) will pave the way for increased M&A activity in 2010. The seller/buyer expectation gap is slowly narrowing. Large-cap exploration and production companies and Master Limited Partnerships have strengthened their balance sheets considerably and are ready to fuel growth again via the M&A route. PwC expects natural gas to continue to be a particular bright spot for acquisitions.

◗;Financial;Services— As the FDIC continues to take actions with troubled banking institutions, watch for consolidation among the regional banks at the hands of the FDIC to be a key theme of 2010. One key question is if private equity will take more seats at the banking deal table. PwC expects the asset management sector will also continue to be popular in this space.

◗;Automotive— With the U.S. automotive industry remade, it will be time for the suppliers to resize and adjust their business models to the new paradigm. Watch for a realignment of product portfolios and manufacturing footprints as tier-one suppliers adjust to the new reality. Low-cost country sourcing will be a continued theme, while Asian acquirers may start to acquire more U.S.-based assets.

In every issue of The Secured Lender, the approximately 250 CFA Directors are asked to provide their opinion on a current question related to commercial finance. The question for March 2010 is: If the enhanced government oversight and regulation of the financial services industry that is now being considered on Capitol Hill had already been in place, do you think the current credit crisis and economic recession would have been prevented?