Downturn forces buyout firms into merger deals

By Simon Meads

LONDON (Reuters) - Private equity firms are becoming drivers of merger deals as the economic downturn is hurting many of their own companies, forcing them into uneasy cooperation with their rivals, industry experts said.

The groups, which are sitting on $1 trillion (700 billion pounds) of unspent investor cash raised during the boom, are mulling mergers of companies they own, and injecting scarce cash into other firms as they look for novel ways to make returns.

Private equity firms whose funds are exhausted may also resort to cash injections from rival houses.

However, the deals have obstacles to overcome as the industry adjusts to the idea of forging closer ties with erstwhile rivals.

"With fewer healthy deals being done, the focus is really on the distressed side," said Scott Dunfrund, co-head of European corporate finance at Houlihan Lokey.

"And with the constrained financing, if I am a private equity principal or partner and I'm looking for ways to grow my portfolio ... this is one of the areas I am going to take a look at."

Houlihan Lokey is currently advising on a potential merger in the auto parts industry, in which one of the parties is in distress and the other is relatively healthy, Dunfrund said, declining to name the companies involved.

Nick Jones, a partner at corporate finance house Clearwater, said he is also advising on potential mergers, and is currently pitching one in the financial services sector to a private equity firm.