First quarter sees pressure on supply

Lower activity in the UK buyouts market is leading to higher prices as demand for quality assets outstrips supply, according to end of quarter figures from middle-market advisory firm Corbett Keeling and Initiative Europe.

“The effect is increased as demand is fuelled by a plethora of new funds coming into existence . . . .as the weight of pension fund money wanting to get into private equity increases,” said Jim Keeling, director of Corbett Keeling. “The effect is further magnified by banks being more and more willing to supply debt and mezzanine funding to very highly geared transactions.”

UK buyouts with values greater or equal to €150m fell in volume and value during the first three months of this year. The market registered 34 deals worth €16.5bn, down from 40 deals worth €21bn at the end of 2004. All figures are on a rolling 12-month basis.

Buyouts less than €150m in value also fell after a brief pick-up in January. This market is running at 142 per annum, with a value of €5.9bn compared with 150 and €6.4bn at the end of 2004. As a percentage of total funding, gearing with mezzanine continues to move up relentlessly. At the end of March, mezzanine and debt accounted for 72% of funding for all deals over €10m in value completed in the preceding 12 months. The corresponding figure at the end of 2004 was only 66%. Gearing without mezzanine remained flatter at 52%, compared with 53% at the end of last year.

“One might be tempted to think that the bankers are doing the private equity community a favour by making debt and mezzanine so readily available. But, as one private equity house said to us recently: ‘This merely shifts returns from private equity funds to the business vendors who are realising higher prices’,” Keeling said.

Multiples paid by private equity firms are now firmly at or around the level paid by the stock market. The lead between private equity and the stock market, in terms of average pricing, has swapped three times in the last six months.