Through its dampening effects on crossborder M&As, the decline of buyout transactions in the current financial market crisis is likely to have depressed FDI flows in the beginning of 2008. It is difficult for private equity firms to obtain necessary loan commitments from banks for highly leveraged buyouts. While they raised a new record amount of funds totalling $543 billion in 2007 (Private Equity Intelligence, 2007), their fundraising in the latter half of 2007 declined by 19%, to $254 billion, compared to the first half of that year.
However, the decline can be seen as a normalization or return to a more
sound and much more sustainable situation (IMF,
2007; ECB, 2007), and a shift towards distressed debt
and infrastructure funds from buyout funds. Several
institutions had warned for some time that the credit
standards for corporate credits, particularly for highly
leveraged buyout loans, were too loose and could
represent a danger for the financial system.
2007: cross-border M&As involving such funds almost doubled, to
$461 billion - the highest share observed to date, accounting for over
one quarter of the value of worldwide M&As (table I.3).
With the size of the funds growing, private equity investors
have been buying larger, and also publicly listed, companies. Some
factors have emerged that raise doubts about the sustainability
of FDI activity by private equity funds (WIR07).
These include a review of the favourable tax rates offered to private equity firms
by authorities in some countries and the risks associated with the
financial behaviour (e.g. high leverage) of such firms, particularly
because of concerns about the availability and cost of credit in
the aftermath of the sub prime mortgage crisis.
They also include an ongoing debate in some countries about possible regulation of
private equity market participants. An increased regulatory burden
could cause the private equity industry to stay away or migrate to
more lightly regulated jurisdictions.