During the boom years, private equity investors capitalised on unprecedented liquidity in the leveraged loans market and the application of innovative management techniques to achieve high rates of return. After the uncertainty of the financial crisis which saw activity fall to levels last seen in the mid-1990s, we have seen some signs of recovery over the last 12 months and reports indicate that both the value and volume of European buyouts are starting to increase. The question is whether this apparent recovery is sustainable in the face of continuing economic uncertainty and constraints on capital.

Historically, the period immediately following a downturn has been a time for increased activity. After a couple of quieter years, many private equity investors need to achieve exits to demonstrate returns in the context of new fundraising activity and there is a build-up of 'dry powder' – committed equity that needs to be invested. 2010 saw the initial public offering markets start to reopen for larger assets with a sustainable long-term equity story.

However, the premise of increased activity following a downturn is based primarily on an assumption that sellers will have reduced their valuation expectations during the downturn. On the whole, this assumption has not proved correct over the last 12 months, particularly as distress levels have fallen, and there is therefore often a gap between a seller's value expectations and what a buyer is prepared to pay, particularly in respect of non-trophy assets. From a buyer's perspective, fragile markets and an unpredictable economic outlook mean a conservative approach to projected returns. Successful transactions therefore depend on the buyer being very comfortable with the target's prospects.

As a consequence, we are seeing a greater level of due diligence and analysis of potential value issues among buyers than has been the case in recent years coupled with more hard-fought negotiations and increased sensitivity to abort costs. In terms of pricing structures, we are seeing buyers question the use of a locked box unless the underlying financial information is sufficiently robust. On the sell side, sellers are more focused on well-run processes to maximise value and the need for bidder incentives, such as costs underwrites.

The second constraint to activity levels is that financing remains limited. The wall of leveraged buyout debt to be refinanced over the next few years acts as a constraint on capital to fund new deals. Some banks that have been major lenders to private equity have withdrawn from the market or imposed limits on their exposure to particular sectors or assets. Many assets that are currently in private equity ownership were acquired with debt multiples greatly in excess of those available and buyers are struggling to raise in absolute terms the same level of debt. If transactions are to be completed, this gap needs to be funded. Although we are seeing a variety of techniques employed, including additional equity, alternative debt structures and contingent consideration, it remains a constraint, particularly for those investors who are unable to access a variety of sources of funding.

We are looking to the future with cautious optimism. We expect the signs of a revival in new deals to continue but an uncertain economic outlook, the limited availability of financing and a greater focus on risk will mean that a return to the activity levels seen during the boom years is not likely any time soon.

Christopher Bown chairs the private equity team and Victoria Sigeti is a senior associate at Freshfields Bruckhaus Deringer. For a report on the outlook for the global private equity industry, visit www.freshfields.com/thenewnormal.