It does not come as much of a surprise that the buyout market has collapsed. It is just the amount by which it has crashed. The UK market is down by 75%.
According to the Centre for Management Buyout Research (CMBOR), private equity investments in UK buyouts only reached a disappointing £3.2bn for the first half of the year, down from £12.5bn for the same period last year and making it the lowest half-year figure since 1995.
CMBOR also revealed that the second quarter was even worse than the first, down from £2bn in Q1 to £1.2bn in Q2, despite talk of so-called “green shoots” of recovery.
“Today’s figures will come as a shock to no-one,” says Christian Marriott, director at Barclays Private Equity. “We have previously predicted that the market will settle at a new, much lower level, and the quarter two figures reflect this.”
As expected, distressed sales have risen.
“There were 74 receiverships in the first half of the year, compared with 25 trade sales and nine secondary buyouts,” CMBOR says. “There has now been no exit via stock market flotation of a buyout for two years.”
Significantly, however, the majority of those receiverships were not private equity-backed, according to Marriott, who says: “In the first half of the year, just 10 of these receiverships were private equity-backed deals valued above £10m.”
“When will the market pick up again?” is the question the industry, investors, and third parties are now asking.
According to John Klinck, the global head of alternative investment solutions at State Street, the current sentiment among private equity funds is to look forward rather than back. Wounds have been licked and it is time now to make investments again: it is just a timing issue.
“Private equity funds seem to be biding their time,” Klinck says, “trying to watch and see what’s happening, and to be very careful about when they jump.”
A recent quarterly survey by Grant Thornton certainly reflects those comments. The volume of private equity investments in the UK will pick up in the next 12 months, according to 57% of respondents to its private equity barometer survey.
Going forward, however, the landscape will be very different. The leveraged buyout phenomenon will have been replaced by majority or all-equity deals. Small private equity firms will be partnering with larger players to avoid insolvency. Even the secondary market is expected to be buoyant once more as private equity groups scramble to offload assets and return cash to investors.
“We’re seeing a number of transactions in the US and Europe where portfolio companies have been sold at 50 or 60 cents in the dollar,” says Klinck. Distressed sales will be the norm.