Selling a business in August in any year is not recommended. Starting a process this August is particularly inauspicious, with the credit crisis showing little sign of abating. Those doing so are largely unwilling sellers, forced into the process by wider market events.
Far-flung financial services group Dawnay Day, for example, has fallen into administration. Many of the group’s property assets are on the block. And Austin Reed, the fashion retailer it took private two years ago, has received an approach. Jaeger-owner Howard Tillman is apparently interested in snapping it up at a bargain price.
What is concerning for private equity participants is that many vendors are banks and other financial institutions, desperate to prop up their beleaguered balance sheets with cash. That does not augur well for buyout houses hoping for support for their deals from such lenders.
Dawnay Day is not the only financial institution to see its ambitious leveraged finance model, adopted during the era of easy credit between 2002 and 2007, start to unwind. There have been whispers for the last few months that Halifax Bank of Scotland (HBOS) was refining its aggressive “integrated finance” operation.
This idea first came to prominence at the start of the decade when the bank backed Sir Philip Green when he bought BHS and Arcadia. With HBOS providing all the financing for a deal, entrepreneurs keen to arrange buyouts or buy-ins did not need to bring in a third-party equity provider, leaving them with a greater stake in the targeted business.
Other notable users of this product have been Sir Tom Hunter, who used HBOS to finance his purchase of house builder Crest Nicholson and McCarthy & Stone for a total of £1.73bn as well as numerous smaller businesses. HBOS also backed the £350m buyout of House of Fraser by Icelandic investor Baugur.
However, it now appears that HBOS has retreated somewhat from this model. So far this year, the integrated finance arm has done far fewer transactions. The largest have been April’s £143m additional investment in Integrated Subsea Services and February’s buyout of healthcare business Verna Group from LGV Capital.
Mark Hammond, head of the unit, told IFR Buyouts Europe last month that this was a reflection of current market conditions. “The market is different from a year ago and that has had an effect on all players in the market. There are very few vendors of bigger businesses at the moment.”
However, following a 56% decline in first-half profits and a £4bn rights issue, the bank has decided that it needs to discreetly sell unwanted assets, including investments made by the integrated finance arm. Many of the latter will be sold to a £400m fund set up by UBS, which HBOS will back in some capacity.
This is not an isolated incident. Scottish rival RBS is also carrying out surgery on its own collection of private equity assets, inherited from ABN AMRO. Goldman Sachs is believed to be the purchaser in this instance. And according to sources, 3i is looking to offload a significant part of its US venture capital portfolio.
However, this is not a wholesale withdrawal from direct private equity investments by UK high street banks. Both Barclays Private Equity and Lloyds Development Capital remain active and are continuing to pursue deals.