CMBOR: buyout market may slow

An adverse tax change and growing nervousness in the banking community could end the current boom in the UK private equity market, says the Centre of Management Buyout Research.

The Inland Revenue’s recent decision to eliminate a tax break on loans used to finance buyouts in the UK is likely to cause private equity groups to reduce the pace of new investment, according to new research published by Nottingham-based industry think tank Centre of Management Buyout Research (CMBOR).

Tom Lamb, a managing director of Barclays Private Equity (BPE), told the Financial Times that the new rules on so-called transfer pricing could reduce the returns on buyout investments by approximately 10 percent. This in turn could prompt private equity professionals to “down tools” and approach future investment opportunities with lessened enthusiasm.

BPE is a sponsor of CMBOR alongside professional services firm Deloitte.

The predicted development would mark the end of a period of substantial deal activity in UK private equity. According to CMBOR, the first quarter of 2005 saw the completion of 154 transactions worth a combined £5 billion, £300 million more than in the same period of 2004. 

CMBOR also noted that in addition to the changing fiscal environment, private equity sponsored deal flow could suffer if lenders turn their back on future transactions. Mark Pacitti, corporate finance partner at Deloitte, was quoted as saying that much of the recent deal activity was driven by the “aggressive stapled debt packages” available to financial sponsors. In the event that banks “get nervous” and cut back on their lending, the number and size of private equity deals could both decrease, Pacitti said.

CMBOR’s findings come at a time when European private equity practitioners are growing increasingly uneasy over the prospect of the leveraged finance market taking a turn for the worse in the foreseeable future. Participants are describing the current environment as more and more frothy.

A survey of 100 senior executives at UK corporations published by PricewaterhouseCoopers today said that one quarter of those polled considered  private equity as a “worrying threat” and that the leverage used by private equity houses made it difficult to compete against them in mid-market auction processes.