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Surge in lower mid-market PE deals points to continued recovery in 2014

The total number and value of deals in the UK private equity lower mid-market surged in the second half of 2013, according to Lyceum Capital and Cass Business School’s UK Growth Buyout Dashboard.

The research, which analyses private equity control deals in the GBP10m to GBP100m enterprise value range, found that the total value of buyouts reached GBP1.84bn in the final six months of 2013 – the highest since H1 2011 (GBP1.90bn) and the second largest half yearly total since the study began in 2008.
This figure represents a 68 per cent increase on the GBP1.10bn value recorded in the first half of 2013 and over 50 per cent growth on the GBP1.21bn total for the second half of 2012.
The volume of deals in the lower mid-market also increased as the UK economic recovery began to take hold. A total of 42 transactions completed in the second six months of 2013, contrasting with 36 in the first half of 2013 and 35 in the corresponding period in 2012.
For the whole of 2013, the UK lower mid-market recorded 78 deals, down slightly from 81 in 2012, and growth of 10 per cent in total deal value from GBP2.67bn to GBP2.94bn. In doing so, it outperformed the entire UK buyout arena, in which total deal value fell 21 per cent to EUR16.0bn (2012: EUR20.3bn), and the European private equity market where the overall value declined seven per cent to EUR50.3bn (2012: EUR54.2bn) in 2013, according to the Centre for Management Buyout Research.
Andrew Aylwin, partner at Lyceum Capital, says: “The rebounding economic confidence that we’ve all been reading about for the last six months has shone though in the number and value of UK lower mid-market deal completions in the second half of 2013. Set against the continuing drop off in the value of new investments across the UK and European buyout markets overall, the GBP10m to GBP100m value bracket has again demonstrated its attractiveness as a home for capital looking to back growing, entrepreneurial businesses that are at the heart of the UK economy. This counter-trend growth is exactly the reason why well-established firms have been able to raise new funds, attracting billions of pounds of foreign investment into the UK.
“While there is bound to be some continuing volatility in growth rates of both GDP and investment in the coming quarters, I think 2014 will prove to be a turning-point year in recovering deal volumes. Managers of growing companies aren’t looking for dumb capital to fund their growth – they want business partners who can help them take advantage of increasingly attractive domestic and overseas markets, access new sales channels and invest significantly in their own infrastructure. Well-capitalised, highly-experienced growth investors with track records of building value are ideal partners to support the best of these companies in their quests to deliver long-term sustainable growth.”
Exit volumes and values in the lower mid-market grew in 2013. There were 43 realisations in the segment last year compared to 40 in 2012, while the total value of exits increased 30 per cent from GBP1.47bn to GBP1.92bn over the same period. The first half of 2013 saw 26 exits – representing the best six month period for volumes since H2 2011 (27) – which declined to 17 in the second half of the year.
Scott Moeller, professor in the practice of finance at Cass Business School, says: “Exit volumes and values edged up last year as improving conditions saw shareholders looking to realise the value of their assets. This performance highlights the success of lower mid-market businesses and their investors in delivering organic and acquisitive growth in one of the most challenging periods in history for UK plc. 
“Trade exits increased by almost 30 per cent year-on-year according to our research, suggesting a renewed willingness amongst large corporates in Europe to invest to acquire the right UK businesses as economic conditions improve.
“The growth in activity in the second half of 2013 is in distinct contrast to the merger and acquisition activity in the UK more broadly, which has remained, at best for most sectors, flat. This demonstrates the nature of this lower mid-market as a leading indicator of activity for the UK more generally.”
Sectors in which the UK has historically been a world leader, such as industrials and retail and consumer, were the key targets for lower mid-market deal activity in 2013.
Despite fluctuations in consumer confidence leading to uncertainty in the retail and consumer sector, it was the most active industry in terms of investments in the lower mid-market in 2013. 27 transactions completed in the sector in 2013 compared to 22 in 2012. With deal activity in the retail and consumer industry up until recently characterised by turnaround investments, last year saw renewed interest in growing sub-sectors including dining, sport and leisure, and travel.
Buyouts targeting industrials businesses increased from eight in 2012 to 13 in 2013, driven by growing appetite for advanced, high quality UK-made components across a number of sectors, while the business support services and technology, media and telecoms (TMT) industries saw marginal declines in the total number of transactions they recorded in 2013 compared with a year earlier.

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