The next six months are likely to see an increase both in deal valuations and transactions volume, says the latest Private Equity Confidence Survey (PECS) published by Deloitte & Touche, the accountants.
51 per cent of venture capital and private equity professionals participating tin the survey expected average transaction size to increase over the next six months, with just nine per cent anticipating a fall in deal value. This represents a shift in sentiment from the start of the year when most respondents expected transaction sizes to remain the same.
Optimism regarding deal size is accompanied by an anticipated increase in volume of transactions, with 66 per cent of VCs expecting deal activity to increase.
Deloitte & Touche also found that VCs are becoming more confident about the performance of their investee companies. The survey shows that 42 per cent of VCs believe the financial performance of their portfolio companies will improve, against 17 per cent in the previous quarter. Just two per cent said they anticipated a decline in performance.
“Venture capitalists’ somewhat bullish forecast merely reflects the fact that economic conditions are finally stabilising, giving them the confidence to work on larger transactions which are higher risk and more likely to stall in more volatile times,” said Chris Ward, head of corporate finance advisory at Deloitte & Touche.
The survey highlights an increase in the number of £100m-plus transactions recently completed. “Already we've seen signs of renewed activity in the big-ticket arena,” adds Ward, “with the £860m buyout of Linpac [the packaging business sponsored by Montagu Private Equity] one of a number of recent £100m plus transactions. It will be interesting to see whether VCs in the so-called mid-market gravitate towards larger deals within their segment.”
“There is increasing convergence between buyers’ and vendors’ pricing expectations which is in turn driving deal activity,” according to Ward. “VCs’ confidence in their portfolios will also allow them to focus more time on new investments. With signs that trade buyers are returning to the M&A market, VCs need to take advantage of these encouraging trading conditions before the competition returns.”
The survey also found that 62 per cent of VCs expect the economy to remain stable over the next six months while two thirds expect the prospect of exiting an investment by flotation to improve, partly the result of the successful flotation in July of Yell, the UK-based private equity owned directories business.