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Asset disposals to boost PE activity

Disposals of non-core subsidiaries from large corporates will provide the biggest source of opportunities for private equity investors, according to the latest private equity confidence survey from Deloitte & Touche.

Deal volume is expected to increase with VCs hoping to capitalise on tough economic conditions, with reduced competition from trade buyers and lower pricing. Over 50 per cent of VCs expect deal pricing to reduce over the next six months as stock market volatility takes its toll.

Disposals of group subsidiaries are expected to be an important source of new deal flow, predict 52 per cent of VCs as restructuring continues. There has already been significant activity in this area this quarter with CVC Capital Partners’ EURO665 million acquisition of Halfords from Boots and the GBP330 million acquisition of Kwik Fit from Ford. There are rumours that CVC Capital Partners is looking to merge the two businesses. PE houses are also circling debt-laden French corporate Vivendi Universal, following its announcement of a EURO10 billion asset disposal programme.

Family and private companies are also expected to yield substantial opportunities, according to 20 per cent of VCs, as the impact of April’s capital gains tax changes kicks in.

Secondary buyouts are expected to be the third largest deal source with 15 per cent of VCs expecting these deals to spark the greatest opportunities. Mark Pacitti, a partner at Deloitte & Touche, said: “Formerly regarded as a last resort, secondary buyouts are now a viable exit channel and have accounted for some of the largest deals this year as depressed M&A and IPO markets keep alternative exit routes shut.” A recent example is Morgan Grenfell Private Equity’s sale of Coral Eurobet to Charterhouse Development Capital in a GBP860 million secondary buyout, making a return of three times the money invested. MGPE acquired the betting business from Ladbrokes for GBP390 million in a hotly contested auction in 1999.

Despite pessimistic views on the economy, VCs remain confident about the performance of their investment portfolios, with just seven per cent expecting a decline in performance. However, only 18 per cent anticipate underlying business growth to bring returns.