The private equity industry is yet to feel the full impact of this summer’s credit crunch and the already reduced volume of deals is set to fall further as banks remain reluctant to lend.

New research from BDO Stoy Hayward, the accounting firm, has found that turmoil in the credit markets during August and September has resulted in far fewer deals.

Acquisitions that have been closed were agreed at much lower valuations than the previous quarter.

BDO’s quarterly PEPI index, which tracks the valuations of private company sales to private equity, found that valuations on deals had fallen by 14 per cent in the third quarter to a multiple of 15.3 times a company’s earnings before interest and taxes.

By contrast, valuations of private company sales to corporates fell by just 2 per cent, to 13.4 times earnings.

Jon Breach, a partner in BDO’s mergers and acquisitions practice, said that the reduction in valuations had been because of the continuing lack of availability of debt financing, which had forced private equity to pay less for assets.

He said that banks remained open for deals between £50 million and £100 million, where they could hold the entire debt facility on their own balance sheet. Beyond that, securing financing for deals would remain difficult for months to come as banks continue to work through a huge backlog of leveraged loans. “Because of the syndication risks, banks are reluctant to take more than £150 million on their books,” Mr Breach said. “They want to club together before the deal . . . but that is much more complex.”

Therefore, he said, the volume of deals would “dramatically reduce” in the fourth quarter.

In the M&A boom of the past three years, typically only one or two banks would agree to lend all the money for a transaction in the knowledge that they could easily syndicate out the debt to other institutions after the transaction was closed.

However, in the wake of the credit crisis and investor fears over leveraged loans, the banks will lend only if the syndication can be arranged first.

For that reason, deals today are much slower to arrange and complete than three months ago, as well as being smaller. Mr Breach said that of the 174 private equity deals in the third quarter, only two were worth more than £250 million.

Tom Cooper, head of European M&A at UBS, said: “There’s still a market, but it’s different. It’s more in the traditional mould of club-type transactions rather than syndications.”

Mr Cooper said that for any mid-market-sized deal, at least four or five banks would need to club together, with each agreeing to take a portion of the debt in order for the transaction to proceed.

He said that it was not clear what the cap for deal size was, but added: “I don’t think anyone thinks the big jumbo deals will be back anytime soon.”

Ian Armitage, the founder and chairman of HgCapital, the mid-market private equity firm, said that the reduction in deal valuations was healthy for the market: “It’s very difficult to make sensible decisions when there’s madness all around you.”

He said that HgCapital had succeeded in making at least two acquisitions in recent months, including the €345 million (£240 million) purchase of Fabory, a Dutch nuts and bolts manufacturer. “We got the financing in place . . . it was trickier, but not impossible. Instead of talking to just one bank, now you have to talk to three or four, so you’re effectively increasing your workload threefold.”

Mr Breach said that there could be a rush of deals between now and the first quarter, however, as firms hurry to sell off assets and take advantage of the 10 per cent rate on capital gains tax before it is abolished next April. He said that there was evidence of firms readying businesses for auction.

However, Mr Armitage doubted whether the introduction of a flat 18 per cent levy on capital gains would lead to a stampede of deals. “Unless you’re starting the process now, it will be difficult to get it across the line in time,” he said.

RV Capital collapses

One of the leading market-making groups in the City’s derivatives markets yesterday collapsed into administration facing losses of €15million to €20 million (£10.4 million to £14 million) inflicted by the global credit squeeze.

RV Capital became the first firm in nine years to be declared in default by Liffe, London’s futures market, which feared that it could not meet its obligations. RV, founded in 2006 by Jerome Roussel, a former Société Générale trader, and Duncan Valentine, a Liffe trader, also operates on Eurex and Chicago Board of Trade.

Grant Thornton, drafted in as administrators, said that it was now seeking a “white knight” to rescue the stricken firm.

Trouble ahead

BDO Stoy Hayward predictions:

— full impact of the seismic shift in the debt market has yet to play out in the fourth quarter

— the dramatic change in CGT announced in the PreBudget Report will encourage entrepreneurs and private equity-backed management teams to accelerate their decision to sell

— any indecision by the Chancellor on CGT may lead to a decision to sell being taken too late to ensure deals are concluded by April

— there will be a surge in deals in the first quarter of 2008

— prices will remain steady until the end of the first quarter next year as the banks feel increased pressure to put debt out to meet targets in the new calendar year

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