SummitPoint Management 2008 Outlook: Brisk Private Equity Activity Despite Challenging M&A Environment

Recent years have provided an ideal environment for the U.S. leveraged buy-out industry and SummitPoint Management expects private equity activity to remain strong in 2008 despite the slumping worldwide credit markets. Although middle market deal flow will remain active, continued pressure to reduce fees, increased market volatility, higher interest rates and greater competition are factors that will combine to lower return expectations for equity-sponsored funds. Continued volatility in the economic and national political climates, weak capital and liquidity markets, and tighter valuations will continue to impact deals of all sizes and across all industry sectors. Deals will get done in 2008, but we expect them to be more thoroughly vetted and more conservative in terms of size, leverage, and structure.

Both buy and sell side activity is continuing to be impacted by a challenging M&A environment that is expected to remain throughout 2008. Demand buoying the current pace of buy-out activity is being tempered by a tight financing market, however, we expect four factors will combine to sustain aggregate deal flow throughout 2008:

1. Large amounts of committed but uninvested capital in search of yield.
2. Increasing use of group bids to raise the number and size of potential targets.
3. Weak dollar attracting overseas investment to the U.S.
4. Expectation of Federal Reserve intervention to stave off recession.

On the supply side, corporate leverage remains generally low, balance sheets are strong, and healthy profits are allowing companies to sustain higher levels of debt. Additionally, we expect to see that relatively attractive multiples, aging private equity portfolios, and the continued demand from corporate strategic buyers will support a steady number of more carefully considered portfolio company exits among private equity firms.

In response to the challenging macro-economic and industry-specific risk profiles, PEGs are enhancing deliberate and structured investment analysis processes resulting in expedited and higher quality decisions. Additionally, we expect PEGs to give increased attention to institutionalizing and executing management fundamentals in order to create genuine business value within their portfolio companies and to differentiate themselves within a crowded asset class:

1. Increase tactical level knowledge, awareness and improvement of key business and work processes.
2. Implement tactical strategies designed to reduce operating costs.
3. Improve sales effectiveness particularly in addressing the global marketplace.
4. Pay down debt.
5. Attract and retain superior management talent by providing attractive performance incentives and a distraction-free work environment.

The 2008 M&A market will undoubtedly be a challenging one for general private equity investment. However, seasoned and well-managed participants accustomed to executing through cyclical and “precipitating event” driven volatility should be well-positioned to experience better than average buying opportunities, sustained portfolio returns and to aggressively compete against recently-awakened corporate strategic buyers.