An interview with Robert Donaldson, head of M&A and private equity, at Baker Tilly

How is the private equity industry developing in continental Europe?
I think that London will remain the pre-eminent centre in Europe just because things gravitate to where there are skills and expertise. There is a cluster effect.

There are a lot of people in London used to servicing private equity, such as lawyers, consultants and due diligence providers of all descriptions. That tends to mean that London is a great base to invest in Europe.

Equally, it helps to have local expertise in terms of spotting opportunities early and transacting well.

I think what you will continue to see is businesses that are headquartered in London but have investing offices across Europe, such as Bridgepoint. You will continue to see investment in European networks but London will remain the hub.

To what extent are the current credit problems likely to cause short- or long-term problems for private equity firms?
A little bit of me thinks it is summer madness. It is probably a sensible shock to the system because there are some deals being done and, in particular, some debt being written that didn’t make a great deal of sense, but I think it is a short-term shock.

There will be some indigestion in the debt markets in the short term and I don’t think we will see many large transactions in the next three or four months, but I don’t really think there will be much in terms of a long-term impact after that.

An awful lot of private equity money has been raised and is waiting to be invested. I think the investing institutions – pension funds and insurance companies – are getting very comfortable with private equity and will continue to invest in new funds.

Are the large deals that we have seen recently still viable? To what extent has the pendulum swung back in favour of trade buyers?
It is likely that the prices that private equity can offer may be trimmed back but I don’t think that another Alliance Boots is unachievable.

It remains as valid as it was at the time but perhaps the playing field in relation to trade buyers is a little bit more level than it was before.

Do you foresee any changes in private equity firms’ preferred exit routes?
The secondary route, which has been incredibly popular, may become a little less so because the prices that can be paid by new equity houses may not be quite as strong as they have been historically.

Again, at the margins you might see a slight rebalance towards trade sales and initial public offerings but I still think it is at the margins. I don’t think that the past month is going to have much of an impact on the long-term trends that you saw before.

How well do you feel the private equity industry is understood by public companies in Europe?
We closed the buyout of a public company in August and the depth of misunderstanding was very deep.

This is not helped by the screaming headlines of the newspapers about rapacious private equity.

There was an inherent suspicion that private equity buyers can’t be trusted and that they change terms.

Although it may not be the concern of a vendor, there is a perception that private equity investing involves mystical black-box techniques that nobody really understands.

I think that the industry has let itself become a soft target for the media and the unions.

A good chunk of the corporate world does get private equity, and can see the advantages of it for them, but at least an equal chunk don’t understand it and refuse to spend time trying to understand it.

The industry has been working to try to improve that understanding but I still think there is quite a long way to go.

What could the private equity industry do to change perceptions and improve its reputation?
There is no use in sitting back and saying it is unfair. I think the industry has to help people to understand that there isn’t a great deal of secrecy.

If you are an investor in a private equity fund you actually get good quality information. They also have to explain why leverage is important in these deals because it creates a strong discipline, and why it is not inappropriate to put leverage into businesses.

It would also help to highlight the private equity success stories rather than picking out deals that have failed.

Public companies make mistakes too: they sometimes destroy businesses, they do a deal too far and overstretch themselves. It happens all the time in the public market but it is the private equity deals that come under the most scrutiny. The onus is on us to bang the drum louder and explain.

If a private equity firm acquires a significant portion of a listed company’s stock, what does it tend to mean in terms of IR activity?
There aren’t many examples of private equity firms buying listed companies stock. Where that happens, I think it would change IR activity.

The IR team needs to understand that they are dealing with a different animal that tends to take a much closer handle on its investments because it has much fewer investments.

They would have to get used to a more questioning hands-on investor. Where a company totally comes off the market, I think there is a far more limited role for IR.

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