The Agents

Trevor Watson

Director,

Valuation services,

Davis Coffer Lyons

Private equity has over recent years come to dominate the pub and restaurant sector. The question now is how active will these companies be in the current, rather different, market climate?

Private-equity houses still have substantial funds to invest and, like other businesses, standing still isn't an option. Funds raised from investors will need to be spent. Unquestionably, therefore, private-equity houses will continue to be active.

To date, most private-equity deals have been structured with a great deal of debt - highly leveraged. The main change affecting the market is the lack of debt finance available. We've gone from a market with plentiful debt to one of restricted (and more expensive) debt. It will be harder for deals to be leveraged to the same extent, leading to downward pressure on values.

Private-equity houses are also likely to take a more cautious view as to prospects to develop businesses over the next three years as a result of declining consumer confidence. Over the course of the last 10 years, acquisitions in our sector have been fuelled by an expectation of rapid growth through site rollout, corporate acquisition and asset value appreciation. These have underpinned their business models. These assumptions can no longer be taken for granted.

Private-equity buyers will be expecting to sell in three to five years' time into a significantly different market place. They will be particularly keen to identify the bottom of the cycle which is expected to occur sometime during 2008.

Purchasers are not expecting to have to pay premium prices for the growth prospects of their business. They will buy based on actual trading performance rather than projections and will take a cautious view towards growth/rollout prospects - a very different approach to that taken by buyers during recent boom years.

Currently, many publicly-quoted companies' share prices have fallen significantly. These businesses have high-quality assets valued by the publicly-quoted market at low figures. This provides opportunities for private-equity purchasers to buy premium assets in distressed circumstances, such as the recent stake building in Clapham House by Capricorn Ventures. These opportunities are ideal for private-equity houses. It is unlikely that private-equity operators will be optimistic with regard to potential turnaround situations.

Private equity is here to stay, I am pleased to report, and levels of activity are likely to remain high, but with a changed emphasis on quality of assets and value expectations.