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Confidence levels of mid-market private equity investors drop on caution for valuation prospects30/08/2006. Source: Grant Thornton Corporate Finance. 
 Confidence levels and valuation expectations of mid-market VCs for the next twelve months have dipped compared to the beginning of the year, according to quarterly research carried out by Grant Thornton.
During Q2 2006 just a quarter of mid-market private equity investors questioned expected an increase in deal volumes over the next twelve months (compared to 31% in Q1 06), while 16% of VCs expected a decrease in transactions during the same timeframe (compared to 8% in Q1 06). The remainder (59%) anticipated that deal volumes would remain steady over the next twelve months (compared to 61% in Q1 06).
The outlook for valuations was equally uncertain. Just under a quarter (24%) of VC predicted an increase in the valuation of mid-market transactions over the next twelve months, compared to 38% during the first quarter of the year. Moreover, almost one in four private equity investors predicted a decrease in the level of mid-market valuations over the same timeframe, compared to just one in ten VCs during the first quarter of the year.
"During the second quarter of the year we have seen a notable decline in the level of VCs' confidence," said Mat Bhagrath, partner at Grant Thornton Corporate Finance. "Whilst the appetite for mid-market private equity deals is as strong as ever, it's a case of too many VCs chasing too few deals. There is also a concern that banks may become more cautious about their approach to the leveraged debt market, given the dizzy levels that some deals have achieved."
"The expected drop in the level of valuations should be seen as more of a minor pricing correction or the cooling down of an over-heated market as opposed to anything more tangible," he continued.
From the survey's results, business services (21%), healthcare (19%) and financial services (13%) remain the favoured hot spots for mid-market private equity investment. However, the computing (10%), leisure (9%) and media (4%) sectors follow closely behind.
Bhagrath continued: "It is of little surprise that business services, healthcare and financial services continue to retain such strong appeal. However, despite the dominance of these three sectors, it is encouraging to see the private equity market opening up shop to such a broader range of sectors. One such example is the evolution of the leisure sector, which is largely stimulated by the investment demand for fitness centres and travel and tourism services."
Looking ahead, Bhagrath expects the publishing sector will see increased investor attention in the coming months. During the first quarter of the year, those VCs (5% of sample) who cited an intention to invest in the media sector over the next twelve months said they would predominantly put their money in marketing & advertising services (46%) followed by radio & film and publishing (both 23% of sample). However, during the second quarter of the year, the overwhelming majority of VCs who said they would invest in the media sector anticipated that they would put their money in the publishing sector (50%).
"The publishing sector is one example of an evolving sector which is demanding a greater share of private equity investors' attention. As traditional advertising revenues from magazines come under continued pressure from online sources, many publishing houses are diversifying their services and snapping up event management companies. I expect to see continued consolidation in this sector in the coming months."
Despite a notable drop in market confidence between the first and second quarter of this year, Bhagrath asserts that the private equity market is still buoyant.
He explained: "The drop in market confidence levels is more a reflection of a competitive market than any underlying macro concerns. Despite the volatility of the world markets and the uncertainty over UK interest rates, corporate profitability is strong and financing conditions remain favourable. Based on our pipeline of deals, the drop in market confidence levels is a temporary glitch, and was provided by the prospect of a quieter summer period for deal-makers," he concluded.
Grant Thornton is a corporate finance firm dedicated to serving the needs of middle-market companies. For more information please visit www.grant-thornton.co.uk
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