Insight - The Private Angle.

(From Financial Director)

Byline: Richard Willsher.

Mergers and acquisitions used to be the almost exclusive preserve of the corporate sector. But recent data from JP Morgan reveals that private equity buyers accounted for 10% of such deals in the US and 20% in Europe from Q1 2001 to Q2 2004. Increasingly, corporates, particularly publicly listed ones, face stiff competition from institutional buyers when bidding for businesses.

Mark Pacitti, private equity partner at Deloitte, scotches the old myth that trade buyers will pay more for a business than institutional buyers. "It is often the case that financial buyers will outbid them," he says. "You may find when you get down to the last three bidders for a business that they are all financial buyers."

With $150bn available for investment in private equity in the US and UK, according to JP Morgan, institutions certainly have the financial strength to compete against trade buyers. But some argue that that competition is unfair because corporates are fighting with one arm tied behind their backs.

"Private equity firms have been able to raise and then pay down low-cost debt during the recent low interest rate regime," explains Ken Lever, FD of UK/US-listed engineering group Tomkins. "Their timescales have tended to be three-to-five years. They have been in a better position than many corporates that, because they are principally concerned with growing the value of their business, have to look at a much longer timescale, say, between seven and 10 years. At the same time, because of the scrutiny they are under, they are less able to leverage themselves as highly as a private equity firm," he says.

Hence, as debt is cheaper than equity, institutional buyers have an advantage over corporates in that they can justify paying higher prices - and generate lower returns - and still make economic returns for their investors.