UK private equity hits yearly high

Returning confidence and greater availability of debt financing has allowed deal value to jump 36% from the previous quarter – in sharp contrast to trade valuations, now at their lowest in 4 years.

Private equity is on its path to a solid recovery, according to a recent study. 

Accountancy and business advisory firm BDO, which released its quarterly pricing index today, found that buyout deal values have bounced back 36 percent from Q1 2013, when they had fallen to a three-year low. 

The survey, which compared the enterprise value/EBITDA ratio on the sale of UK private companies to trade and private equity owners, also showed the number of transactions was up from 72 to 91 deals this quarter. This represented a 26 percent improvement on the previous period, allowing volumes to reach their highest level in more than a year. 

These findings stood in stark contrast to prices paid by corporate buyers, which posted their fourth consecutive quarter of decline: trade valuations fell to 6.9x EBITDA from 8.5x in Q1 2013, and registered a 27 percent drop year-on-year. Transaction volumes, at 380 trade deals completed, also were at their lowest in more than two years. 

When you’ve got both trade and private equity bidding for what is seen as strategic and good quality businesses, it is a much more fair fight than it was a year or two ago

Roger Buckley

BDO attributed these diverging trends to the financing climate, which it described as more favourable to private equity firms. These were now able to tap into a broader and deeper  array of funding sources, as well as secure financing from more diverse geographies, the firm said. 

“We’ve seen recent transactions whereby debt funds have been used as opposed to traditional lenders, as well as examples where New York lenders have been used rather than UK lenders,” Roger Buckley, a partner at BDO, told Private Equity International

This has allowed a number of buyout firms to offer compelling prices to sellers without sacrificing their return objectives, Buckley explained. As a result, they were more often at an advantage compared to when competing with trade buyers, which were still thought to be suffering from the poor credit conditions offered by traditional sources of funding.   

“I wouldn’t say it’s back to the 2006-2007 base but there’s an element of a change in the debt markets over the last few months which does seem to be having an impact,” Buckley said. “Private equity appetite for good quality business is strong.”

By contrast, he explained, trade buyers had a lot of cash – but were less frequently willing to spend it. That had an obvious impact on the prices they were able to offer to sellers. “When you’ve got both trade and private equity bidding for what is seen as strategic and good quality businesses, it is a much more fair fight than it was a year or two ago.”