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Trends: July 2001

Secondary buy-outs on the rise; exits on the wane, private equity performs well for UK pension funds, IPO and M&A activity doom and gloom, US private equity returns up…

Secondary buy-outs up, exits down
Secondary buy-outs rose 30 per cent between and January and June this year, according to a report by Zephus Corporate Finance Knowledge. In the meantime, IPOs almost halved and trade sales dropped by 40 per cent from the same period last year. The Wall Street Journal Europe (27/28.7.01) put this down to the poor stock market performance and large corporates being unable to raise finance for acquisitions in the current economic climate. So instead, private equity firms are selling their investments to each other and increasingly following a buy-and-build strategy. This allows them to create larger businesses from smaller purchases of companies in the same sector - Duke Street Capital's recent purchase of Focus-Do-It-All, Wickes and Great Mills, for example. The Zephus report also said that the value of exits decreased by 45 per cent in the first six months of this year, from £15bn to £8.3bn. The total number of publicly disclosed transactions fell from 307 in the first six months of 2000 to 189 this year.

UK Buy-outs still strong despite M&A downturn
The UK buy-out market has continued to power ahead despite the collapse in M&A activity, according to figures released last month by the Centre for Management Buy-Out Research. The value of buy-outs jumped 56 per cent to £13.5bn in the first six months of the year compared with the same period last year, while M&A activity more generally plummeted 71 per cent.

Tom Lamb, managing director of Barclays Private Equity, said present market conditions favoured private equity firms, which had more cash at their disposal than firms struggling to resist external pressures from the economic downturn. 'With most potential trade buyers increasingly distracted by their own trading difficulties, the private equity houses are well placed to go bargain hunting, particularly where there is a forced seller. Cash is king,' he said. The difficulty of the market was reflected in the falling number of exits in the first half of this year. They fell 42 per cent to just 78, with receiverships accounting for 44 per cent of them.
AltAssets 9.7.01

Private equity more accepted by middle-market companies
Middle-market companies are shifting their preference for future financing from debt to equity, a report by Gresham Trust found. Concerns over interest rates and a general despondency over the economy have forced companies to seek alternative forms of finance to the more traditional bank loan. The report said that 25 per cent of middle-market companies were now financed by private equity, compared to 20 per cent in December 2000.
eFinancial News, 18.7.01

Pension funds expect greater private equity exposure
UK pension funds expect to increase their investment in private equity following the Myners Review on institutional investment, but it will be some time before the change becomes evident, said a survey produced by JP Morgan Fleming Asset Management and Pensions Week. It found that 67 per cent of funds thought the changes proposed by Myners about strategic asset allocation decision-making would result in more private equity investment, although only about 20 per cent said they had yet reappraised their strategy since the report's publication in March.

The survey found that only 41 per cent of pension funds currently had any exposure to private equity. The average allocation was a tiny 1.75 per cent of total funds. Only two per cent of funds had anything approaching five per cent allocated to the asset class. But the low level of private equity investment at the moment understated enthusiasm going forward, with over half of respondents saying they were likely to invest in private equity in the future.
AltAssets 17.7.01

No signs of UK IPO market uplift…
The UK's IPO market remains lifeless and there is little hope of it stirring in the near future, according to the latest report from KPMG Corporate Finance. Activity has barely flickered since flotations came to a virtual standstill at the start of the year, KPMG said. Only six trading companies joined the main market in the first half of the year, compared with 28 during the same period of 2000, raising a total of £5.1bn. In total there were 40 newcomers, raising £6.8bn, but 34 of these were investment trust and venture capital trust launches.

Neil Austin, head of new issues at KPMG, could find little positive to say about the findings. ‘We are now half way through the year and the main London market remains dormant. High quality companies with a strong story can find an appetite but usually only at the lower end of their valuation expectations. As long as we see profit warnings, earnings downgrades and general economic uncertainty, the markets are unlikely to budge,' he said.
AltAssets 3.7.01

…and none in the US either
Venture-backed IPOs slowed to a trickle in the second quarter of this year, falling to just nine from 11 in the first quarter and a recent peak of 78 in the third quarter of 2000, according to a new report. The findings reinforced how scarce the exit opportunities have become since the middle of 2000. Venture Economics and the US National Venture Capital Association said that the nine IPOs raised $676.4m in the second quarter, compared with $929.5m in the first and a massive $7.2bn in the third quarter of last year.
AltAssets 11.7.01

US private equity returns up in Q1
Private equity returns in the US were better in the first quarter of 2001 than those in the last quarter of last year, said PrivateEquityCentral (13.7.01). Although hardly stunning, they were also less disastrous than investments in publicly quoted equities. Cambridge Associates research reported net returns on US private equity investments at –5.7 per cent, up from –7 per cent in Q4 2000; the figures for US venture capital were -15.7 per cent and –18.1 per cent respectively.

Global M&A activity grinds to a halt
Global M&A activity slowed to a standstill in the second quarter of the year and is well behind the levels reached in the same period of 2000. Thomson Financial figures showed that there were 7,300 deals in the latest period worth a total of $456.9bn, only two per cent higher than in the first quarter and 44 per cent down on the second quarter of last year. The European market did little to offset the gloom from the US, rising only six per cent on the quarter to a total value of $165bn.
AltAssets 4.7.01

Dot.com deaths may be levelling off
The brutal death rate for dot.com companies looked as though it might be reaching a plateau, according to preliminary global figures from Webmergers. It said that 53 companies were shut down or went bankrupt in June, compared with 60 in May and 59 in April. Webmergers has been tracking dotcom implosions since January 2000 and has so far counted at least 555 ‘substantial' company closures.
AltAssets 4.7.01

Private equity star performer for UK local authority pension funds
Venture capital and private equity were comfortably the strongest performing asset class for UK local authority pension funds last year, according to a new report. The report, compiled by performance specialists WM Company, said the average return from ‘other investments' was 32.5 per cent in the year to March 31, compared with an overall average return of just 6.3 per cent. WM Company said long-term performance by private equity had also been very strong and outperformed equities over the last ten years. But it cautioned that there was a massive range of results for the asset class –almost 100 per cent difference between best and worst over the last year - reflecting their more volatile nature.
AltAssets 2.7.01

Private equity investors see healthcare as one of few bright spots
The healthcare sector has emerged as one of the few bright spots in an otherwise gloomy investment firmament, private equity investors say. Adrian Johnson, chief executive of Legal & General Ventures, which has just completed the purchase of Craegmoor Healthcare Group, said ‘it is probably one of the few sectors that is attractive at the moment'. At the same time, new figures in the US showed a big jump in venture capital investment in the healthcare sector in the second quarter of this year as the former favourites, such as technology, struggle to pull themselves out of the mire. The National Venture Capital Association said venture funds invested $1.47bn into healthcare firms in the second quarter, up from $1.07bn at the same time last year. Healthcare investing as a whole accounted for 13.8 per cent of all second-quarter financing, a big jump from only 3.9 per cent a year ago.
AltAssets 31.7.01

Cars a clue to Silicon Valley health
A new index of the state of US private equity has emerged - the waiting lists for Mercedes-Benz cars. Last year, if you wanted to buy one in Silicon Valley you'd have been laughed out the door. The average waiting time was six months. And yet now, thanks to the 60 per cent crash of Nasdaq since March 2000, Mercedes is apparently reporting order cancellations at the rate of 35 to 40 a week.
Connectis, August 2001