Lack of big deals hits private equity

UK private equity managers have tightened their purse strings in the first half of the year, as economic uncertainty and higher prices have brought the recovery in the buy-out market to a shrieking halt.

The value of UK private equity led buy-outs in the first six months dropped to £5.7bn from £8.6bn in first half of the previous year, according to research from the Centre for Management Buy-out Research at Nottingham University, to be published today.

Deal activity this year has so far been lower than in the fourth quarter of 2010 alone, when 44 transactions had added up to a value of £5.8bn.

The sputtering recovery comes as a setback to the industry after its fast emergence from the financial crisis in 2010. One reason for the slowdown has been the complete absence of the £1bn-plus deals that dominated the headlines in the second half of the past year.

The biggest transactions in the first six months were Advent International’s £925m purchase of clinic operator Priory Group, Apollo’s and CVC’s joint £888m buy-out of Brit Insurance and the £677m sale of mobile phone retailer Phones 4U to BC Partners.

The slowdown in deals was even greater in the mid-market sector of transactions (with an enterprise value £250m-£500m), where the total value fell by 57 per cent from £1.9bn for five deals in the second half to £836m for just two deals so far this year.

“It is a combination of economic uncertainty and high competition for some of the best assets that is driving up prices and denting the volume of deals,” said Christiian Marriott, director at Barclays Private Equity, which sponsors the research.

A weak second quarter in particular reduced sharply the UK’s share of the European market from two-fifths in the whole of last year to just over a quarter in the first half of this year.

“I do not think the figures will be very comforting for private equity groups that want to do deals in the UK. There will be a lot of people here chasing very few deals,” Mr Marriott said.

Rod Ball, research fellow at the Nottingham University Business School, said: “The UK may struggle to reach last year’s volume unless a very big deal will come along.”

In the absence of deal-flow from strategic sellers, private equity groups continued in the first half to pass the parcel by selling portfolio companies to each other. The share of “secondary deals” hit a peak of 57 per cent of all deals in the months from April to June.

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