The number of UK buyouts which were exited into receivership in 2007 rose to its highest number since 2003, according to the Centre for Management Buyout Research.
The number of exits into receivership rose from 71 in 2006 to 106 in 2007. The rise in private equity-backed company bankruptcies was combined with fall in the average value of private equity exits from £26.9 billion ($53.4 billion; €34.1 billion) the previous year to £23.8 billion in 2007. This was despite a rise in the number of exits from 335 to 441 leading to a drop in average exit value from £80.2 million to £59.3 million in 2007, slightly more than a quarter of the value.
Due to the significant problems in the global credit markets, worries have been raised that highly leveraged private equity deals will also run into problems should they underperform.
But the majority of deals entering receivership are relatively small. UK newspaper Financial Times was told by the report’s co-sponsor Barclays Private Equity that these deals that only 20 of these deals were worth more than £10 million.
The value of exits significantly trailed the average value of deals in 2007, which hit a record £45.6 billion, up from approximately £27 billion the previous year.
The abundant liquidity in the credit markets in the first half of 2007 facilitated unprecedented mega deals, including Kohlberg Kravis Roberts’ take-private of FTSE 100 company Alliance Boots for £11.1 billion, the largest ever European buyout, which swelled deal volume.
Due to worries of a default at a highly leveraged company the negative sentiment towards buyouts and highly leveraged deals in 2007 has seen credits in the US trading at their highest level of distress in nearly five years, according to rating agency Standard and Poor’s.