The volume and value of deals completed during the first nine months of 2011 in the lower mid-market investment space has increased year on year for the past three years, 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 63 transactions completed between 1 January 2011 and 30 September 2011. This compares to 50 investments for the same period of 2010 and just 25 during the first nine months of 2009.
During Q3 2011, deal volume has built on an encouraging first six months of 2011 with a greater number of deals completed than in Q2. The combined value of those deals fell slightly (from GBP794 million to GBP785 million) but both volume and value of deals was still higher than the same quarter of 2010.
Q3 deal value being lower than Q2 despite five more transactions, indicates that there are fewer large deal opportunities however the lower mid-market continues to replenish itself as new businesses enter the space looking to grow with private equity investment.
The combined deal value of GBP785 million exceeds the GBP698 million recorded during Q3 2010 and the GBP220 million of Q3 2009.
The highest transaction value recorded in the last three months was GBP87.8 million, compared to a high of GBP100 million in Q2 H1 2010.
Meanwhile, transactions valued between GBP50 million and GBP100 million fell from seven in Q2 to five in Q3. The majority of the 22 lower mid-market deals completed were in the GBP26 million – GBP50 million range, with 86 per cent under GBP50 million.
The increase in deal activity indicates that there is a growing appetite for investment and that transactions should continue to rise unless there is a significant reversal in the state of the wider economy. There may not currently be the appetite for the larger end deals in the mid-market space but as long as volume maintains its upward trend, the necessary deal flow which keeps the market moving does exist.
Management buyouts (MBOs) and secondary buyouts (SBOs) remained the most prevalent transaction types for private equity investors, but the number of MBOs completed in Q3 2011 actually fell to nine from 12 in Q3 2010 – lower than each of the previous six quarters back to Q1 2010.
There were also two public to private delistings during Q3, compared to one in each of the previous two quarters.
No Initial Public Offerings (IPOs) were recorded, a trend which stretches back to Q1 of 2010 and is unsurprising in a financial climate of weak capital markets where so many anticipated floats have been shelved.
A total of nine secondary buy-outs (SBOs) characterised the quarter – the highest number of any quarter during the last two years and an indication that private equity firms are now beginning to sell assets that they have held onto throughout the depths of the economic downturn.
There were six exits to trade, higher than the previous two quarters but lower than the eight which took place in Q3 2010.
Technology, media, telecommunications (TMT) businesses continue to dominate the lower mid-market with eight out of 22 deals this quarter (38 per cent) and five transactions in business support services.
Retail – undoubtedly one of the sectors hardest hit by a dip in consumer spending – continues an encouraging run of three deals or more completing in every quarter since Q2 2010.
Andrew Aylwin (pictured), Partner at Lyceum Capital, says: “In the GBP10m to GBP100m value range, UK private equity deal volumes continue to recover. With 63 completed transactions so far for the 9 months to 30th September, the market is trending back to historical norms of 100+ control deals a year. The UK lower mid-market segment remains a plentiful source of high quality opportunities across a range of sectors and private equity firms such as Lyceum Capital continue to play a key role in supporting dynamic companies that need capital to continue their successful development and drive the recovery of UK plc.”
Professor Scott Moeller at Cass Business School, says: “This performance of the UK lower- mid market in the third quarter is in distinct contrast to the overall market when much larger deals of GBP100 million plus are considered. That market has declined during the past two quarters and some reports show it declining dramatically in Q3 – Bloomberg, for example, this week reported a 43 per cent decline in deals with European purchasers for the overall market. Therefore, the volume of deals in the lower mid market is encouraging in this difficult economic environment, and may prove in the next quarter to continue to be resilient. There is further evidence in our figures of a positive shift in the market with a strong mix of industries, including healthcare, which was absent last quarter and a resurgence in technology deals.”
