UK mid-market bucks European buyout decline

The UK lower mid-market continues to defy the moribund wider buyout market in mainland Europe, according to a report from Lyceum Capital and Cass Business School.

The recovery in the UK private equity’s lower mid-market continued during the first quarter of 2012 despite a sharp decline in transaction activity in the European buyout market, according to Lyceum Capital and Cass Business School’s UK Growth Buyout Dashboard.

The quarterly analysis records UK-headquartered private equity control deals in the £10 million to £100 million enterprise value range.

Against a backdrop of Eurozone crises, low growth economies and a market-wide liquidity squeeze, no other segment of private equity has continued to weather the storm as effectively

Andrew Aylwin, Lyceum Capital

A total of 20 deals were completed across the segment in the first quarter with an aggregate enterprise value of £710 million (€860m; $1.1bn). While this represented a reduction on the previous quarter, when a two-year record 27 deals worth £789 million were completed, they were 25 percent ahead of average 2010 levels and consistent with most 2011 quarters, the report said.

This is in sharp contrast to the wider European buyout market, which recorded 157 deals totalling €8.1 billion, down from 223 transactions totalling €11.8 billion in the previous quarter, falls of 31 percent and 30 percent respectively, according to data from Arle Capital cited by the report.

“Set in the context of the wider buyout market, the performance of the lower mid-market in Q1 provides further evidence of its resilience and recovery. Against a backdrop of Eurozone crises, low growth economies and a market-wide liquidity squeeze, no other segment of private equity has continued to weather the storm as effectively,” said Lyceum partner Andrew Aylwin.

European buyout activity is being constrained by the uncertainty created by the Eurozone crisis, which flared again this week due to renewed fears over the state of Spain and Italy. In addition, the region’s banks are paring back lending and selling off debt portfolios to meet capital reserve requirements coming into effect in 2013.

The resilience of the lower mid-market is down to reliability and quality of deal flow, reduced reliance on leverage and significant scope for sector consolidation, Aylwin said.

One notable figure is the contribution of the UK support services sector to overall deal flow, accounting for 40 percent of all activity in the range. The report said this highlighted the important role SMEs have to play in the corporate efficiency agenda, as large enterprises face a combination of slow growth and rising costs.

The retail and leisure sectors accounted for another 30 percent of deals with six buyouts. There was a particular focus on aspirational brands and distressed assets that have suffered from declining consumer disposable income, said the report.

Smaller deals continued to dominate in the first three months of 2012, with deals between £10 million and £50 million comprising 75 percent of all buyouts. “The lower mid-market shows a consistency of activity which is lacking amongst larger deals, where the first quarter showed a marked decline in activity levels not seen for almost a decade,” said Cass Business School professor Scott Mueller.

The segment did not completely escape the wider problems in Europe, however. The report showed six exits in Q1, compared to 10 in the previous quarter and 12 during the same period in 2011, as many sponsors chose to wait until Eurozone concerns alleviate and UK growth further improves.

Lyceum has begun raising its latest fund, Lyceum Capital Fund III, targeting £275 million, according to a source close to the process. The roadshow officially began last month, the source said, as Private Equity International predicted in January.