Bolt on acquisitions set to boost M&A activity

THE heat may be fading from the private equity market but bolt-on acquisitions look set to rise.

Research by BDO Stoy Hayward Corporate Finance shows that 96% of private equity investors believe that the credit crunch has resulted in the industry reducing the prices it will pay for businesses.

However, investors are divided on how far valuations have fallen, which is contributing to uncertainty on pricing in the market.

Around 30% of private equity respondents said that they had reduced company prices by more than 20% while 36% said they had reduced prices marginally by only 5 to 10%.

Economic conditions have also increased the length of time that private equity firms are holding onto their investments.

According to the survey, 91% of private equity firms now expect their investment holding periods to increase as a result of the credit crunch.

More than 70% per cent of private equity firms said they had already delayed commencing a sale process because of this and 95% of these respondents said that this delay was more than a year.

Despite the uncertainty, businesses backed by private equity are keen to be involved in M&A activity.

The survey reveals that 51% of private equity backed companies expect to acquire another business prior to being sold on.

The appetite for “bolt on” acquisitions is also supported by private equity firms where 97% expect at least one in four of the companies in their portfolio to undertake a bolt-on prior to exit and 70% say that they expect to conduct bolt-on acquisitions in at least half of their portfolio companies.

Alex White, corporate finance partner at BDO Stoy Hayward LLP said:

“The private equity market is deeply divided on company valuations and uncertainty about value has led to sales being put on hold. This could be a mistake if valuations converge downwards in the next few years.

“There is therefore a strong argument for company owners to sell now despite the uncertainty because a significant number of buyers are still paying reasonable prices.”

He continued: “Although private equity company sales are slowing, there is a massive demand to bolt on acquisitions to existing investments. There are more than 1,200 mid-market private equity portfolio companies and bolt-on deals will underpin a lot of M&A in the mid-market for the next few years.”

The Private Equity Mid-Market survey explores the views of 100 UK mid market private equity firms and their portfolio companies.