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UK buy-outs hit lowest level since 1996

The UK buy-out market continues to show little sign of recovery as the number of completed deals in 2002 fell for the second year running. The KPMG management buy-out survey for the fourth quarter of 2002 shows a willingness among firms to do deals, but a lack of opportunity open to them caused by volatile public markets and political uncertainty.

According to KPMG's Private Equity Group, the total number of completed larger UK management buy-outs (those with values over £10m) in 2002 fell for the second year running to 120 deals with a total value of £14.6bn.  This is the lowest annual number of such deals since 1996 and the last time the market contracted for two consecutive years was in the last downturn 1990-1991.

Commenting on the year, Charles Milner, Head of Corporate Finance within KPMG's Private Equity Group said, ‘Although 2002 was a disappointing year in terms of activity within the market, this is not reflective of either the appetite or the capacity for deals within the private equity community.  The key factors suppressing private equity activity in 2002 have been a combination of high vendor pricing expectations, a scarcity of quality deals and the general uncertainty in the economic climate.'

Overall, the average level of activity throughout the year was flat, with the peaks being skewed by the few large deals - the two top deals account for 28 per cent of the year's value.  However, some parts of the market were surprisingly robust.  Milner said, ‘By value it is striking how the lower end of the middle market, transactions under £100m, has in fact held up.  Further, there is a feeling in the market now that a number of vendors, particularly those in the private rather than the public marketplace, are becoming more realistic in their price expectations and more committed to completing deals.'  On the buy-side many private equity houses are sitting on large undrawn funds and, whilst it is a difficult fund raising environment, investors are still committing funds to the sector.

Given recent market conditions it would not be unreasonable to expect a return to more normal levels of activity.  Current factors, however, adversely impact this at the present time.  Sustainable M&A activity relies on less volatile capital markets, something that was in short supply in 2002, and will be adversely impacted by global political uncertainty in 2003.  Buyers will be wary of a prolonged economic downturn and there will not be the push to buy if they feel the global economy could stagnate over the next few years.

Milner said, ‘Whilst the private equity market place is currently seeing a pick-up in activity, in particular for middle market transactions, the question remains as to how much will convert.  Prevailing views range from the downright pessimistic to those who are quietly confident of seeing a return to higher levels of completions.  We are in the latter camp.'

Trends
Commenting on market trends Milner adds, ‘We have seen support services, healthcare and financial services as particularly active sectors.  Also there have been a number of larger transactions around highly cash generative and asset backed businesses which can service high levels of debt, such as NCP and the Voyager Pub Group transactions.  Further, and no surprise given the state of the IPO market, secondary buy-outs continue to represent a significant proportion of completions.'

Public markets
Commenting on the interaction between private equity and the public markets, Milner said,  ‘The reduced number and value of public to private MBOs has followed the overall market trend.  However, we anticipate that not only will this transaction type continue to be an important feature of the private equity scene, but that such investments will be supplemented by so-called PIPE (Private Investments into Public Enterprises) transactions whereby private equity monies can be invested in companies which subsequently maintain their quote.'  An example is the recently announced investment into Regus Holdings by Alchemy.

The outlook for 2003
Commenting on the outlook for 2003 Milner said, ‘Whilst clearly there are exceptions, including some excellent exits, 2002 will not be regarded as an easy year for many of those involved in private equity.  Looking ahead there are more fundamental uncertainties than there have been in the recent past, not least of which is the situation in the Gulf.  Private equity investors have the resources, including the cash, to play a significant roll in the M&A scene.  This is already in evidence but clearly this group of investors cannot operate in isolation of wider macro economic or global trends.'

Copyright © 2002 KPMG Corporate Finance

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KPMG Corporate Finance - global independent advisors to the middle market www.kpmg.co.uk