The volume and value of lower mid-market investments completed during the first half of 2011 was the highest seen in any six month period since the onset of the financial crisis, according to research from Lyceum Capital and Cass Business School.
Data from The UK Growth Buyout Dashboard – a quarterly analysis of UK-headquartered private equity control deals in the GBP10 million to GBP100 million segment – shows that 41 transactions completed between 1 January 2011 and 30 June 2011. This compares to 34 investments in the previous six months (1 July 2010 – 31 December 2010), and 33 during the same period last year (1 January 2010 – 30 June 2010).
However, Q2 (at 17 deals) was slower than Q1 (at 24 deals) indicating that confidence in the SME segment of the economy remains patchy and a full-blown recovery has some way yet to go.
The combined deal value of GBP1.65 billion exceeds the GBP1.2 billion recorded during both H2 2010 and H1 2010. In addition, the number of transactions valued between GBP50 million and GBP100 million doubled during the past six months to 12, up from six in the previous half year.
This increase in deal activity demonstrates the resilience of the lower mid-market and reflects the wealth of opportunities that exist to back strong, growing SMEs, a key area of the economy.
Management buyouts (MBOs) remained the most prevalent transaction type for private equity investors, with 26 completing during the first half of 2011, on a par with the second half of 2010.
There was also a notable rise in secondary buyouts (SBOs), up from 5 in H2 2010 to 13 in H1 2011.
A trend which has reversed since 2010 and 2009 is the way in which private equity investments are exited. The first half of 2011 has shown SBOs are the most common exit route, with 13 completing, compared to seven exits to trade. This contrasts to H2 2010 when trade buyers accounted for 15 exits, against five SBOs.
During the first half of 2011, technology, media, telecommunications (TMT) businesses attracted the most private equity investment, with 14 deals completed in the sector, compared with five during the second half of 2010. Nine deals in the business support services industry completed during the first six months of this year.
Andrew Aylwin (pictured), Partner at Lyceum Capital, says: “These deal stats bear out the fact that private equity continues to prove its role as a key source of funding for rapidly growing SMEs. However, I think it’s too early to say the recovery in deal volumes is firmly back on track to historical norms, particularly given the uncertainty in wider Europe hanging over the market. As we have said for the last few quarters, and as is borne out by a quiet time in May and June, it’s likely we’ll see continued volatility in numbers. There’s even a possibility that full year deal volumes in 2011 will not be that much higher than 2010. This only serves to highlight the importance of private equity firms’ ability to originate high quality deal opportunities if they are going to invest their funds in well-priced, attractive companies.
“The market today is pretty polarised, and whilst good quality investments are able to attract capital with reasonable ease, the flakier opportunities are reduced to fighting for the scraps. The good news for investors in the UK lower mid-market is that it has thousands of attractive companies, many of which are ideal for partnership with private equity. These businesses are driving much of what growth there is in UK plc today and, on the back of transformational change, promise to deliver strong results in the coming years.”
Professor Scott Moeller at Cass Business School, adds: “This analysis does demonstrate once again that ‘a rising tide does indeed raise all ships’, as other studies have shown a similar increase in H1 2011 deal volume compared to H1 2010, despite a decline in the second quarter from the first quarter and weakness especially in the past two months. The UK lower mid-market, as with the overall European M&A market, has seen strong activity in the technology and retail sectors in this period. Here in this study, particularly notable is the strong activity in secondary buy-outs, but uncertainty in all sectors of the market can be expected to continue, despite the overall strength in the first half of the year.”
