Price expectations choke UK deal pipeline

Deal volume dropped 28 percent in the third quarter, in part because prices for UK private equity assets still have some way to fall, according to a recent study.

The volume of private equity deals in the UK during the third quarter of 2008 was 28 percent lower than the same period last year, while price multiples have remained relatively steady, according to research from accounting firm BDO Stoy Hayward.

The private equity price index, which measures the average earnings multiple for private equity acquisitions, was 11.2 times for the third quarter of 2008: relatively unchanged from the previous quarter’s 11.1 times.

“We have not seen price expectations drop dramatically. However, prices have come off from the peak and there will be a further reduction in pricing as vendors realise they will not see ’06 and ’07 valuations for a while,” Jon Breach, a corporate finance partner at BDO, told PEO.

“There is a vast overhang of refinancings due in 2009 which will further constrain the banks’ ability to lend, so prices will not pick up before 2010 at the earliest,” he said.

Related research from private equity firm Argos Soditic shows a slightly different story across the Euro zone, where the average price multiple in the first half of 2008 was eight times earnings: down 11 percent from the same period in 2007.

Meanwhile, a survey of UK private equity-backed companies by Investec Private Bank Growth and Acquisition Finance suggested they are more bullish about their prospects of making acquisitions than their publicly-listed counterparts. Forty-three percent said they are likely to make an acquisition in the next two years, compared to 36 percent of publicly listed companies.