Private equity investment recovers in 2010 but still below peak levels

PRIVATE equity investment in the Midlands picked up considerably during 2010 with the region accounting for 20 of the 164 privately financed buy-outs in the UK as a whole.

Investment in the region totalled £1.7bn, well above the £0.14bn generated in the previous 12 months, new figures show.

According to The Centre for Management Buy-out Research (CMBOR), which is sponsored by Ernst & Young and Barclays Private Equity, 2010 saw private equity investment of £18.2bn across the country, this compares to the £4.7bn for the whole of 2009, when just 122 deals were completed.

However, while the Midlands situation improved this year, activity is still well below the market peak of 2007, when 52 deals were completed to a value of £3.1bn.

There were 40 private equity backed buy-outs in 2010 in the UK with a value of over £100m; raising £16bn, 88% of the total value overall.

Mark Stanway, transactions director at Ernst & Young in Birmingham, said: “Confidence is gradually returning to the UK buy-out market.  Very few large deals grab the headlines, but it is key for a regional market like the Midlands to note that overall volumes and values are up in 2010 and 75% of all UK deals are sub £100m.”

Christiian Marriott, Director at Barclays Private Equity, said: “There has been a strong recovery in deals in the over £500m size range but we have yet to see the return of the mega-buy-out due to continuing restrictions on the availability of debt and fewer investment opportunities at this end of the market.”

The average deal structure in 2010 was equity 68% and debt (including mezzanine, loan notes and other finance) at 32%, this is the highest percentage of equity ever, not dissimilar to 2009 but compares to 35% and 65% respectively in 2005.

“This change in deal structure is unsurprising given the fact that banks would only lend up to a point, resulting in increased equity contribution by PE firms,” added Mr Stanway.

“Additionally, with the debt markets still lagging behind the increasing deal activity, this trend is likely to continue in 2011.”

Manufacturing was the largest sector by value in 2010 with a combined value of £5bn; this included the £2.9bn public to private deal of Tomkins. The volume of buy-outs in this sector was 31 compared to 26 in 2009, down from 69 in 2008.

Business Services has been the most active sector in 2010 by volume, with 37 buyouts compared to 22 deals in 2009. The number of Financial Services transactions in 2010 was 11 totalling £2.8bn. This compares to last year’s 12 deals, raising a total of £500m.

Mr Marriott commented: “Buyout levels in the manufacturing sector has shown strong growth following a very quiet 2009, accounting for nearly a third of the total deal value this year, led by the £2.9bn buy-out of Tomkins in September. The financial services sector has not seen the uptick many expected with a single large deal, the £2bn buy-out of RBS Worldpay, dominating activity in this area.”

The number of secondary buy-outs in 2010 was 44 with a total market value of £8.4bn, this compares to 2005 pre-peak levels where there were 54 deals raising a total of £8.7bn.

Mr Stanway said: “Secondary buy-outs are not a new phenomenon, the activity we are seeing this year are similar to the levels in 2004 and 2005.

“They have always been a feature of the market, secondary and tertiary investments are typically about growth – organic and often acquisition. It is sensible and entirely rational for other private equity investors to wish to own, invest in and to support the same companies, and I expect this trend to continue next year.”