The second quarter seems to have got off to a terrific start, fuelled by a flurry of exits from smaller UK private companies. But this could prove a mirage for private equity firms seeking an end to the current drought in major debt fuelled investment activity.
A wave of sales has been completed in early April, but principally for artificial reasons, as vendors have rushed to sell before their effective rate of capital gains tax increased by 80%, from 10% to 18%, last Sunday, April 6.
Some only just managed to beat the deadline. On Saturday
Recent data from the
That appears to have continued so far this year, certainly at the sub £50m level. Last week saw Matrix Private Equity sell Apollo Lifts to Iceni Capital and Milestone Capital Partners acquired Coffee Nation from Primary Capital for £25m.
However, some are predicting that the rest of the second quarter will see some significant shifts in exit strategy for mid market private equity players.
Jacques Callaghan, managing director of
He says this is partly because “many portfolio companies of PE firms have already been sold so the supply of businesses for sale is being driven down significantly. Q2 last year was frenetic and this year will be down significantly.”
Others agree. “A lot of the deals which would have been done later in the year have been brought forward for CGT reasons,” says one. Callaghan maintains that in the first quarter buyout deal flow was “quite resilient” and not just because of CGT issues.
Although only three deals around the £1bn mark have been unveiled, “the same number of £100m to £500m deals has been completed compared with last year and the number of £25m to £100m deals have been slightly up because of the CGT factor.”
One significant trend is a rise in the number of public companies being courted by private equity investors, particularly in the small and mid cap areas, which have seen their valued hit by the wider market turmoil.
“35% of buyouts over £100m in the UK were PTPs in Q1 of 2008 against just 5% last year. I expect to see that trend continue for the rest of the year,” says Callaghan.
This is reassuring for mid market players. However, for those more dependent on larger financing packages, the outlook remains tough.
Looking at deals of all sizes, Thomson Financial data shows that in the first week of April 55 takeovers of European companies were announced against 192 last year. 2007 was the busiest start to the second quarter this century. 2008 was the quietest.
The total value of announced deals, at US$3.47bn was less than a tenth of last year’s record US$35bn of deals. It will take time for financial confidence to return and allow deal values to approach that high water mark again.