UK private equity drops sharply in first three quarters

During the first three-quarters of this year, buyouts worth a total of £16.8bn were recorded, compared with £40.2bn in the first three-quarters of 2007.

The UK private equity market is in the midst of a sharp slowdown, according to data released by the Centre for Management Buy-out Research (CMBOR).

A severe shortage of credit is being compounded by a lack of willing sellers stalling deal flow.

“All sellers are feeling the same,” said Christiian Marriott, director at Barclays Private Equity, which sponsors the CMBOR data. “Fewer corporates, families and private equity firms are selling at the moment because they are all asking themselves whether next year will be a better time to sell.”

Robert Donaldson, head of M&A and private equity at corporate finance boutique Baker Tilly, said prices wouldn’t come back in the short term: “The debt markets are going to be snarled up for a good 12–18 months,” he said. “If you put a sale on hold now, you are putting it on hold for 18 months.”

With private sellers battening down the hatches in the medium term, buyout firms are increasingly drawn to the capital markets.

“The stock market is offering a deeper pool of opportunities than it has for some time – there are some undervalued companies, relatively speaking, plus willing sellers,” said Marriott.

In the UK, listed marketing group Creston and listed drug and alcohol-testing business Concateno are both currently being courted by private equity buyers, with other targets expected to come to light in the coming months.

Interestingly, the CMBOR data showed that public-to-private deals have formed a substantial proportion of buyouts in the year to-date, accounting for the five largest buyouts of the year so far.

“It’s not just a case of buyout players running slide rules over listed businesses, but also AIM companies themselves sitting there and wondering why they need the quote and if there isn’t a more efficient place for them to be,” said Donaldson.

Tumultuous fortnight

“If it wasn’t for the last few weeks of instability, I would have said that the UK buyout market had found something approaching a post-credit crunch equilibrium,” said Marriott.

The data showed that despite the liquidity-constrained environment, the UK buyout industry continued to function fairly healthily – total deal values only fell back to 2006 levels in the first three-quarters.

“It was a quieter market but it was still functioning. However, the events of the last few weeks mean we will have to wait and see how deal activity holds up from now on,” said Marriott.

Donaldson believes the shock of the last few weeks could help break the deadlock between buyer and seller. “One consequence of the drama of the last few weeks could be that vendors are jolted back to reality and will start realising that they will not be able to get last year’s prices for their businesses,” he said.

The research showed that the £250m-plus buyout range suffered more than any other. Buyouts in this category fell to their lowest levels since 2004.

In 2007, there were 32 such deals. In the first nine months of this year, there were 11, highlighting the plight of the mega buyout funds in a climate where lending over a certain threshold has come to a standstill.

Commenting on what Q4 would bring was something Marriott didn’t want to be drawn into. “There’s a reasonable chance we could see some deals,” he said, adding that BPE was working hard to move several deals through. He added that although there was lots of nervousness, some banks were still willing to lend for the right deal.