RESEARCH SHOWS THAT 90% OF MID-MARKET PRIVATE EQUITY FUNDS ARE TAKING LESS DEBT THAN OFFERED BY BANKS

PRIVATE EQUITY INDUSTRY NOW MORE COMFORTABLE INVESTING IN COMPANIES WITH DEFINED BENEFIT PENSION DEFICITS

20 October 2005, London - New research from Close Brothers Corporate Finance  (Close Brothers) focusing on mid-market private equity groups  reveals that 90% of private equity groups are taking less debt than banks are offering them.

While 74% of private equity groups expect some degree of deflation in the debt markets, the research shows that over a quarter believe the shift in the debt markets over the past two years is here to stay.

Commenting on the research findings, Mark Barrow, Head of Private Equity Coverage at Close Brothers, said:

"The traditional risk-takers, private equity funds are now turning down what they perceive as excessively risky debt packages in favour of a level of debt that gives a company room to breathe. The buoyant debt markets have given rise to a situation where lenders are taking equity risk.

"It is revealing that a significant minority of groups believe that there has been a permanent shift in the debt markets, underpinned by a low interest, low inflation environment. However, private equity groups are nervous about the debt that is being offered. These mixed signals show we are approaching a point of inflection where it could go either way."

Pension schemes

Contrary to previous commentary, the research shows that there is a high level of willingness to consider investing in companies with defined benefit pension schemes – nearly half of funds would invest in a company even if it had a scheme in significant shortfall. However, private equity groups overwhelmingly view recent changes to UK pensions regulations as a negative development. While many have not encountered
the new pensions regulator, only 5% of private equity groups think the new pensions regulations are a positive development.

Mark Barrow commented:

"Private equity groups are generally very unhappy with the new pensions regulations. They feel the new regulator adds uncertainty, moral hazard and leaves them lacking control of the transaction process. This is already hindering private equity's ability to work with firms with defined benefit schemes at a time when we should be encouraging funds to find ways around this issue. As a result, many companies will languish without private equity support."

For further information please contact:

Close Brothers

Justin Clark        +44 (0)20 7655 3784

Further survey findings – hedge funds

The research also revealed that hedge funds are not a significant issue of mid-market private equity. Only 5% of mid-market institutions are concerned about hedge funds moving into their space and only 11% had considered setting up a fund of their own.

Mark Barrow commented:

"These statistics reinforce our view that hedge funds aren't currently a feature of mid-market private equity. Hedge funds require a very different skill set from private equity, with a focus on rapid reaction and high investment churn – mid-market private equity investments often do not offer the level of liquidity and marketability required by hedge funds."