Great expectations

Some £5 billion (€5.8 billion; $7.7 billion) worth of buyouts were completed in the UK in the first quarter of 2010, exceeding the £4.7 billion of deals recorded in the whole of 2009, according to new figures from the Centre for Management Buy-Out Research (CMBOR).

The private equity industry will take further comfort from the 39 percent increase in the number of exits recorded in the first quarter, compared with the previous three months, as buyout firms sold 43 UK businesses, according to CMBOR. However, there were no private equity-backed IPOs of UK companies in the first quarter of 2010.

The relative surge in deal value was helped by Kohlberg Kravis Roberts’ £955 million acquisition of the Pets at Home pet-accessories retail chain from Bridgepoint, which was the largest UK buyout in the period.

Pets at Home: Big deal for Bridgepoint

Bridgepoint was also involved in the second biggest deal of the first quarter by taking private Care UK, the nursing home group, in a transaction valued at £423 million including debt. Charterhouse Capital Partners bought the Deb Group cleaning products group from Barclays Private Equity for £325 million, in the third largest acquisition of the period.

Despite the encouraging trend in deal activity, both in terms of new investments and disposals, the heads of many of the UK’s best-known private equity firms are cautious about the outlook for their industry over the next year. They agree that the bounce in deal activity recorded in the first quarter is a welcome development, but point out that this is compared to an almost non-existent base last year. And they question whether deal activity will increase much, if at all, in the foreseeable future.


Tom Lamb, chairman of the investment committee of Barclays Private Equity, says: “I expect a gradual increase on the activity levels we saw in the first quarter. Prices are still pretty high and haven’t fallen much for good businesses. People thought there would be a lot of bargains around but there aren’t, partly because many private equity firms are competing for deals.”

Peter Brooks, chief executive of LDC, the private equity arm of Lloyds Banking Group, says: “There is still a lot of uncertainty in the market and this is likely to persist until the autumn.”

“Deal activity for the rest of the year should at least stay at the same level as in the first quarter, although further growth will be tainted by the prospect of higher taxes, higher national insurance and government spending cuts,” Brooks adds.

Jon Moulton, who left Alchemy Partners last year to set up Better Capital, adds: “Deal volumes will probably increase simply because they couldn’t go down.”

Meanwhile, Philip Buscombe, chairman of Lyceum Capital Partners, believes that the level of deals may have already peaked for the year: “In the mid-market and lower mid-market the increase in activity seen so far this year may settle back but overall there will be good volume uplift this year.”

To put the first quarter performance into perspective, the £5 billion worth of UK buy-outs recorded compares to £20.4 billion of deals when private equity acquisitions hit their peak in the second quarter of 2007.

There are plenty of reasons why the recent growth rate in deals – the value of UK buyouts in the first quarter was more than four times as large as in the final quarter of 2009 – is unlikely to continue.


In the run up to the May UK general election, there was a huge amount of uncertainty, with buyout heads predicting months  of political wrangling. The election result  aside, it remained to be seen whether the UK’s fragile eco nomic recovery will continue over the coming months.

To make matters worse, despite the recent increase in exits, it remains difficult for private equity firms to dispose of their investments, which in turn makes it harder for them to raise new funds.

The biggest obstacle to doing deals continues to be the difficulty of securing debt financing, the lifeblood of the private equity industry. While some, although not all, argue that the debt markets have recovered from their early-2009 trough, everyone agrees that credit for leveraged buyouts remains extraordinarily tight.

Edmund Truell, former chief executive of Duke Street Capital and now head of Pension Corporation and Curzon Park Capital, says: “The availability of debt remains a big, big issue because it is such an important determinant of deals getting done.”

“People say it’s getting better, but I haven’t seen much evidence of this,” Truell adds.

LDC’s Brooks says: “The situation is better than it was 12 months ago, but debt is still not widely available. Only a few banks are lending and they are being more selective and some are still not lending at all.”

Mike Robbins, head of UK buyouts at 3i, says: “Conversations with banking syndicates are taking much longer – the process can take months and months.”

What relaxation there has been on the part of the banks has been almost exclusively confined to small and mid-market deals with an enterprise value of up to £400 million. Bigger deals, which require huge loan syndication, are still finding it virtually impossible to secure financing.


Robert Tchenguiz, a deal-maker who specialises in large transactions, says the debt markets are still incredibly tight. “A recovery in the [larger] buy-out market depends on whether the banks decide to come and play again. At the moment it’s pretty quiet, even non-existent. Until we get some liquidity back into the system there will not be many deals and that may take some time.”

Simon Wildig, a partner at CBPE Capital, says that the situation is improving for mid-market deals, albeit it a fairly slow pace. He estimates that the amount of money banks are prepared to lend for a good quality asset has increased from a low of between 2 and 2.5 times earnings before interest, tax, depreciation and amortisation (EBITDA) around a year ago, to between 2.5 and 3 times now.

Wildig believes there will be good opportunities for private equity investments in 2011 as banks begin to restructure and sell many of the businesses they have assumed control of as borrowers have breached their covenants in the credit crunch.

“There are still plenty of portfolio businesses in banks’ portfolios that need to be restructured and not many have flushed through the system yet. This provides opportunities for private equity,” Wildig says.

Banks are also looking to shed other non-core businesses to boost their balance sheets and focus their operations, providing a further opportunity for private equity firms. HSBC’s train leasing arm, which owns about a third of the UK’s rolling stock, and Royal Bank of Scotland’s Global Merchant Services group are among those bank-owned businesses currently conducting auctions.

Looking beyond the actions of the banks and debt markets, there is understandably considerable political and economic uncertainty in advance of the general election, which makes the outlook for the buy-out industry even harder to predict than usual.

The election will herald a significant round of tax increases and spending cuts that are unlikely to finally be clarified until the third quarter, according to Philip Shaw, chief economist at Investec.

“There is a big fiscal tightening on the way and considerable uncertainty about where the spending cuts will fall and private equity is potentially very vulnerable to these spending changes. There is also uncertainty about exactly how taxes will change and by how much,” Shaw says.

Richard Campin, a director at private equity firm Exponent, says: “Private equity needs stability. We need to know what the government’s policies on taxation and spending are.”

However, for Jeremy Sharman, a former director of HgCapital and now non-executive director at Park Resorts, the caravan park group owned by GI Partners, most of the political uncertainty will have been removed well before the third quarter of 2010.

Sharman says: “We may well see a number of deals dragged out for a while until things are a bit clearer. But it won’t make much difference to buy-out volumes over the course of the year.”

There is also the uncertainty relating to Britain’s overall economy, which has a huge bearing on the performance of portfolio companies, banks’ confidence about lending, the equity markets and, in turn, the potential for exits in the form of IPOs and trade sales.

CBPE’s Wildig says: “Last year was survival mode and this year is consolidation. If you can get through this year, 2011 should be a better year both for private equity-owned business and the economy as a whole.”


The Office for National Statistics reported that the UK economy grew by 0.2 percent in the first quarter of 2010, marking the second consecutive quarter of growth after the six consecutive quarters of decline. However, the growth figure for the first quarter amounted to just half of the consensus estimate, underscoring fears the UK may still face a double-dip recession.

The economy is still forecast to grow at only 1 percent in 2010, according to Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club.

Private equity firms have been doing everything they can to prepare their portfolios for any storms they may have yet to face. For example, 3i’s Mike Robbins says the FTSE 100 investment firm shifted a large proportion of its resources from doing deals to managing its investments last year when trading conditions deteriorated significantly in the fourth quarter of 2008. In the heady days of 2005, 2006 and 2007, 3i allocated about 70 percent of its resources to deal-making and 30 percent to managing its portfolio. By last year, only 20 percent of resources were allocated to deals with the remaining 80 percent working on the existing investments, according to Robbins. The split is now 50/50.


It seems unlikely that the exit market will improve this year. Many potential trade buyers will continue to be strapped for cash, while the pulled first-quarter flotations of the private-equity owned groups, New Look, the fashion retailer, Merlin Entertainment, the operator of Madame Tussauds, and Travelport, the travel consultancy, have dashed hopes that the equity markets could be ready for a spate of IPOs.

Lyceum Capital’s Buscombe says: “The IPO market is not terribly attractive – investors are still pretty picky about what they buy.”

However, there is a growing sense that, for the right deals, an IPO is at least feasible, which marks a significant improvement on a year ago.

Ian Armitage, chief executive of HgCapital, says: “Investors are being cautious with their money. But companies that can demonstrate good growth prospects and have a productive use for capital being raised can get away into the market.”

Although the outlook for private equity over the next year may be far from rosy, most buyout experts believe the industry is in much better shape than a year ago. Deal activity is encouraging, the debt markets are slowly thawing and the worst of the general economic woes would seem to have passed.

Ironically, while private equity firms are competing vigorously for deals they appear to be their own best friends at the moment. Nearly three-quarters (73 per cent) of the UK buyouts recorded by value in the first quarter were secondary buyouts, with the sale of businesses from one private equity firm to another accounting for two of the three biggest deals in the period – Pets At Home and Debs Group.

Secondary buy-outs may not be ideal for some investors, as many of them have committed funds to private equity managers on both the sell-side and buy-side of these transactions. Nevertheless, for private equity firms, such deals are a lifesaver.