Relatively high asset prices are among the obstacles still standing in the way of a fullblown recovery in the UK buyout market.
According to UK Watch, a piece of new research published today by Initiative Europe in conjunction with Royal Bank Private Equity, the average price/earnings ratio for deals worth more than E10m has remained stable over an 18-month period, at just under 10. In January 2002, the average ratio was 9.18.
The finding help explain why UK deal-flow remains modest. Many buyout practitioners agree that vendor expectations on price are still too high to trigger a significant increase in activity. In a recent interview with PEO Peter Jacobs, head of European private equity at PricewaterhouseCoopers, said that vendor expectations had still not dropped sufficiently for dealflow to pick up dramatically. 'Many would have welcomed a more dramatic downturn in the public market, because vendor expectations would have taken a real hammering. A bit more vendor pain would not have gone amiss.'
Today's UK Watch research shows that the number and value of UK buyouts is now falling at a slower rate. 12-month rolling figures show that in January 2002 the total value of UK buyouts stood at E27bn based on 133 deals. At the peak of the market in June 2001, there had been 172 deals valued at E37.5bn.
'The market is coming back but the peaks of activity we saw in 2001 are some way off', commented Tim Farazmand, a director at RBPE. 'The economic uncertainties of the fourth quarter of 2001 have largely dissipated and we have seen this reflected in greater accessibility to funding for buyout opportunities through both the equity and debt markets.'
In contrast to the relative price stability in the buyout markets, the FTSE Small Cap price-earnings ratio has shown large fluctuations, UK Watch notes. Having soared from 21 in October 2000 to 55 by late 55, it had come back down to 35.3 at end January 2002. 'This level of volatility reflects the illiquid nature of mid-market quoted stocks where trading levels have become increasingly depressed as earnings have fallen', said Farazmand.