Private equity cushions M&A fall

Reports on M&A levels in 2002 from both KPMG and CMBOR highlight the increasing importance of private equity in the weakened M&A market.

KPMG’s Corporate Finance analysis of global M&A deals shows a 47 per cent reduction in value and a 24 per cent decline in numbers compared to last year. Europe saw a drop of 40 per cent in value and 29 per cent by volume. This is the fifth successive half-yearly drop. More positively, KPMG reports that private equity is the most robust part of the market.

According to KPMG private equity-backed deals now account for six per cent of total M&A activity by value, compared to two per cent in 2000. Stephen Barrett, international chairman of KPMG Corporate Finance, said: “Private equity is cushioning the fall of M&A…. Private equity is well-placed to lead the way towards an upturn in activity – these institutions certainly have the funds available.”

According to the Centre for Management Buy-Out Research, private equity plays an even larger role in the UK’s M&A market. Deals backed by private equity firms accounted for just under half of 2002’s total M&A value, rising from 14.7 per cent in 1995 to 40.1 per cent in 2001 to 44.5 per cent in 2002.

CMBOR cited a lack of deals at the top end of the market as one cause for the overall drop in value of the UK’s M&A market, which fell to £14.3 billion from £19.5 billion in 2001. The number of transactions dropped to its lowest level since 1994 with 566 deals completed. CMBOR found the number small- to mid-market deals remained relatively stable and that there was a rise in the number of management buy-ins.

The number of secondary buyouts continued to rise in 2002, accounting for 10.8 per cent of the market compared to 4.9 per cent last year. However, there are still unanswered questions about this type of deal. Tom Lamb, UK managing director of Barclays Private Equity, commented: “It remains to be seen whether many of these businesses are ultimately exitable in the traditional sense and whether secondary buyouts can deliver satisfactory returns as an asset class.”

The UK also saw a surge in the number of public-to-private deals as disillusionment with the public markets grows. Mark Pacitti, Deloitte & Touche Corporate Finance, said: “As the stock market falls, the gap between small cap and the FTSE 350 indices continues to widen, encouraging shrewd financial buyers to spot investment opportunities. At the same time, small quoted firms are growing increasingly frustrated by poor stock market valuations and more receptive to approaches from private equity houses. The climate is perfect for public-to-private activity to accelerate further.” CMBOR recorded 18 de-listing in 2002.