Close Brothers offers contrarian research

Secondary deals used to be seen as the poor relation to prime origination but these days they are a core type of private equity transaction. However, this could all be about to end according to recent research. Close Brothers statistics show that the average amount of time private equity groups hold companies in their current portfolios today is only 2.3 years, compared with a typical holding period of a portfolio company of three to five years.

Due to this quick turnaround, the finance house predicts a significant shortfall in secondary buyout opportunities in the UK over the next 18 months, which up till now have made up a significant portion of deal flow – in the first seven months of this year secondary deals made up over 50% in the €50m to €500m range, a 25% increase from 2002.

Mark Borrow, head of the private equity coverage group at Close Brothers Corporate Finance, said: “It is a very noticeable trend that portfolio cupboards are looking quite bare and that we’re about to witness a dearth of secondary buyout opportunities. This will force private equity groups to look elsewhere to source deals.”

One alternative transaction that private equity groups are expected to focus on is public-to-private deals. In 2005, there were 35 public-to-private transactions across Europe, valued at €31bn. In the first half of 2006 alone there have been 10 public-to-privates valued at €23bn. Close Brothers highlights this trend in their research in spite of recent high profile examples of failed private equity-initiated take-privates that indicate shareholders of public companies are now more loath to accept approaches from private equity groups.