A Pret A Manger branch in central London, photographed on 26 July 2017. Picture credit: Tolga Akmen
Pret A Manger was bought out for £1.5bn in a transaction outside a formal auction

Private equity groups are increasingly seeking assets outside of formal auctions as competition heats up, and sellers look to bilateral deals as a more efficient way to dispose of their assets.

The number of bilateral deals rose by 71 per cent in 2017 compared to the previous year, according to analysis by Investec. The bank, which analysed 587 transactions involving UK-based companies, said the value of these deals rose from £1.06bn in 2016 to £7.98bn in 2017, representing 19 per cent of all transactions.

The research comes less than a week after consumer giant JAB agreed to buy sandwich chain Pret A Manger for £1.5bn in a transaction outside a formal auction. The price represented 15 times earnings before interest, tax, depreciation and amortisation.

Private equity insiders said the rise in bilateral transactions was a reaction in a highly competitive environment where a growing number of buyout groups were chasing a finite number of assets, leading to record-high valuations.

“Competition for deals is fierce and people are much more willing to pay the highest price straight away and go to the seller directly,” said a seasoned private equity fundraiser. “This is leading to buyers with high conviction telling sellers ‘we’ll just pay the price that you would expect’.”

The person added that bilateral deals gave sellers an alternative to going through an auction riddled with competition or having to list in volatile markets.

The research also showed that there has been an increase in the number of failed auctions — 42 per cent of all deals between £100m and £250m in enterprise value failed to complete up to the end of March 2018 compared to 39 per cent in the preceding 18 months.

Christian Hess at Investec said proprietary deals were also more efficient and potentially less costly. “Multiples paid in a bilateral deal are not meaningfully different, they may only be slightly smaller,” he said. “But the chances of succeeding are higher and the cost of failing is lower.”

He said that the rise of bilateral deals showed “private equity firms are really struggling to find value in auctions”. He added: “Auctions are competitive to the point where private equity investors are deciding that if they want to uncover value, they need to look where no one else is looking.”

Investec analysed all portfolio company acquisitions and sales made by private equity investors of UK-headquartered companies from April 2016 to March 2017 and from April 2017 to March 2018.

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