The gradual recovery in deal flow in private equity’s UK lower mid-market continued during the second quarter of 2012, as the Eurozone crises’ impact on confidence and the availability of leveraged debt continued to dampen the wider continental buyout market.

According to Lyceum Capital and Cass Business School’s UK Growth Buyout Dashboard, the quarterly analysis of UK-headquartered private equity control deals in the GBP10m to GBP100m enterprise value range, a total of 25 deals completed across the segment during the first three months of the year with an aggregate value of GBP728m.
 
The figures represent a 25 per cent increase in volume compared to the previous quarter, which saw 20 transactions in the value bracket, and modest, three per cent growth in total value from GBP710m between January and March 2012. The period also saw a year-on-year increase of 32 per cent in volume, compared to 19 transactions in the segment in Q2 2011.
 
Aggregate value for Q2 was almost 40 per cent ahead of the average level for 2010, while the uptick in volume compared to the 2010 mean figure was approximately 60 per cent, charting the progress of the UK lower mid-market’s recovery in recent years.
 
While total value of UK lower mid-market deals during H1 2012 recorded a 19 per cent decline compared to the first six months of 2011, the total volume of deals remained at levels seen a year earlier, at 45.
 
The results come in contrast to the constrained European buyout market. It recorded sharp declines in total deal volume (441) of 41 per cent and value (EUR25bn) of 34 per cent in H1, highlighting the resilience of UK’s lower mid-market investors and the segment’s population of SMEs in the face of Eurozone crises, low growth and reduced liquidity.
 
Deals in the GBP10m to GBP50m value sub-range continued to dominate in Q2 2012, making up over 90 per cent of all buyouts in the segment. There were three deals valued between GBP51m and GBP100m. The average deal value for Q1 was GBP29m, as private equity firms continued to identify and transact value accretive buyouts at the lower end of the market.
 
The data confirms that primary buyouts remain a key source of deal flow in the value range, with 16 management buyouts completed during the second quarter of this year representing 64 per cent of deals in the lower mid-market, compared to over 80 per cent of all transactions in the first six months of the year.
 
There were 14 exits in Q2 of this year compared to just six in the previous quarter and nine during the same period in 2011, with firms able to achieve attractive valuations for their investments despite concerns surrounding low domestic growth and wider volatility in the Eurozone.
 
Andrew Aylwin (pictured), partner at Lyceum Capital, says: “With no clear resolution to the Eurozone banking and sovereign debt crises in sight, and the UK having endured a double dip recession between October and March, the performance of the country’s lower mid-market during Q2 clearly shows the resilience of both the consistency and quality of opportunities.
 
“The UK lower mid-market is also well positioned to continue its steady recovery based on its lower reliance on leveraged finance, SMEs’ need for growth capital, and the buy-and-build potential within a number of growing or emerging industries – which provide even greater capacity for medium-term expansion.
 
“Investors are increasingly being selected by management teams and their selling shareholders because of their ability to deliver transformational change and create value for shareholders and customers, as well as regional and national economies though job and wealth creation. In turn, targeted private equity firms with considerable sector track records at lower mid-market level are leading the value range’s continued improvement via their expertise, rather than financial firepower alone.”