2010 certainly appears to have finished with a flourish.
At SL Capital Partners, we have seen a significant rise in realisations as the year has progressed. In our North American mid-market fund of funds vehicle, distributions received in the second half of 2010 were 90 percent higher than those received in the first half of the year. In Europe, the equivalent number was 62 percent higher. This is against a backdrop of 2010 distributions being 142 percent and 588 percent higher than last year for each geography respectively.
Of course the level of realisations in 2010 is a long way off the peak experienced in 2007, but encouragingly what is different about recent realisations, at least in our portfolios, is that proportionally less of them have been exited to other private equity players.
Across our portfolios, 51 percent of realisations were to trade buyers in 2010 compared to 40 percent in 2007. This is contrary to recent industry statistics, but this year we have seen more trade buyers who, having prudently built cash reserves during the downturn, are looking for strategic acquisitions.
Compared with 2007 pricing, most opportunities look fairer, if not cheaper. At the peak of the market trade, buyers were regularly outbid by private equity funds.
While there are circumstances in which multiple rounds of private equity ownership can be accretive, outbidding the obvious eventual acquirer can be a risky strategy. Since the crisis some lucky trade buyers have managed to buy their intended target from distressed private equity owners at a substantial discount, proving the old adage better to be lucky than good.
I view this development as a positive and in many respects a return to the traditional buyout life cycle. I fully expect that some of today’s trade acquisitions will become tomorrow’s non-core disposals. Corporate memories are often shorter than one would expect. As a long term asset class private equity should engender longer memories.
Regardless of exit route the question remains as to whether this ramping up of realisations will continue in 2011. Anecdotally, we are hearing of more exits scheduled for the first quarter of 2011, suggesting the current trend will continue.
However, there has been an element of picking the low hanging fruit. Nevertheless, as we leave 2010 the tidings are positive for a better 2011.
Graeme Faulds is a partner with SL Capital Partners.