Receivership takes lion’s share in UK buyouts

The latest figures make for sobering reading as recent deal volume slumped to levels that have not been seen in 23 years.

In Q1 2009 the total number of deals completed amounted to 88, which was on par with Q4 1986 and is nearly half the Q1 2008 figure of 153.

It must be noted there has been a steady decrease in the number of deals that have been completed since 2003, the point when private equity firms began to favour fewer larger deals over numerous smaller deals, but in 2009 that theory does not apply.

The total transaction value of deals in Q1 reached just over £2bn, a far cry from over £7bn raised in the same period in 2008. “Sellers and buyers cannot agree on prices at the moment. Some sellers have very unrealistic prices in mind but at some point it will shake up and prices will fall,” explains Hilary Prescott, partner in the European private equity group at Covington & Burling.

On top of deal volumes reaching record lows, CMBOR also revealed that receivership has become the most common type of exit for private equity firms. In Q1 2009 there were 27 exits, and 15 of those were receiverships. In Q1 2007, 59 deals were completed with 17 receiverships.

But despite the first quarter’s gloomy tidings, not all is lost. It is true that receiverships outgunned trade sales by almost two to one in Q4 2008 and Q1 2009, but the number of receiverships decreased from 17 in the last quarter of 2008 to 15 in Q1 of this year. “Relative to the actual level of distress in the market, receiverships are actually remarkably low,” says Jon Moulton, founder of Alchemy Partners.

And as the numbers of receiverships declined, the time it takes for a company to fail has increased which indicates that while private equity firms are not pursuing new deals, they are increasing their holding periods in a bid to turn their portfolio companies around. PE-backed companies are now taking an average of 80 months to go into receivership.

Jacques Callaghan, managing director of Hawkpoint explains this slow process: “At the end of the day no one wants a company to go into receivership. It is taking a long time for companies to fail because there is a lengthy negotiation process between the company, the sponsor and the lender to decide what can be done. Banks do not want to make write-downs or have to manage the assets.”