Private equity funds need to learn that one has to work for money

In the absence of bank credits, transactions worth hundreds of millions of euros have become history for consultants in mergers and acquisitions, whilst private equity funds need to work more and dig deeper into their pockets in order to finance their investments.

“It is difficult to have activity on the M&A market in the absence of economic growth patterns and in the absence of access to funding. Since leverage (boosting investment profitability by using borrowed money) is out of the picture, investors will have to work harder and contribute more of their own capital to financing the transactions,” says Ioana Filipescu, managing director of Raiffeisen Investment Romania.

The mergers and acquisitions market amounted to 1.1 billion euros in the first eight months of this year, 75% less than in the similar period of last year. After a 16% decline to 5.5 billion euros, the market will deepen its fall this year to 2 billion euros, an over 60% decline.

The high demands of local entrepreneurs have most often been cited as hindrances to sealing transactions. “Entrepreneurs’ expectations are where they should be. Private equity funds need to learn that one has to work for their money. On the consultants’ side, the decline of the mergers and acquisitions market should bring about more involvement in transactions,” added Filipescu.

On the other hand, the fall in the value of transactions concluded this year will halve consulting firms’ revenues. According to ZF estimates, if one considers a success fee of 1 to 5% of the value of the transaction, it results that consulting firms collected revenues ranging between 55 and 275 million euros last year. This year, overall revenues will decline to 20-100 million euros. There are over 200 professionals providing consultancy on the mergers and acquisitions market. Only 12% of the 100 transactions sealed this year have been concluded by private equity funds, with the market dominated by strategic investors.