Conditions in the UK private equity industry are forecast to improve over the next five years as debt markets improve, buyers return to the market and private equity firms exploit large cash balances and cheap valuations to add assets to their portfolios, according to latest report from IBISWorld, the UK’s largest publisher of industry research.
Industry revenue and profitability should grow moderately in line with this. Regulation poses a threat to the industry, with banking reforms and changes to takeover laws expected to increase borrowing costs and make it harder for private equity firms to engage in leveraged buyouts. IBISWorld forecasts industry revenue will increase at an average annualised rate of 4.0% over the next five years, reaching about GBP1.7 billion in 2016-17. Revenue is expected to grow by 2.1% in 2012-13.
Private equity investments were very kind to both investors in private equity funds and the private equity firms that managed them between 2003 and 2007. Stable economic conditions, steadily rising share markets and cheap, abundant debt financing fuelled a global boom in large private equity buyouts, with numerous major companies bought by private equity, overhauled and sold at large profits. This resulted in strong returns for investors in private equity funds, along with strong fee revenue for private equity firms. Many firms also contribute some of their own capital to their deals, giving them capital gains in addition to the fees they receive from investors. Some of the major deals involving UK companies during this period included KKR’s buyout of Alliance Boots and BC Partners’ purchase of Foxtons, while a GBP10 billion bid for Sainsbury’s by CVC, Blackstone and KKR ultimately fell through.
The financial crisis put an end to the cheap credit conditions and consistently rising asset prices, resulting in substantially reduced private equity activity. Returns and fee revenue dropped, but the lower asset prices and reduced competition from other investors provided the opportunity for the private equity sector to pick up stakes in companies at bargain prices. After a resurgence during 2010-11 as debt markets improved and strategic buyers returned to the market, the industry’s fortunes are expected to sour once again in 2011-12. The rapidly deteriorating economic outlook and turbulent financial markets are expected to hammer asset valuations, increase debt costs and weigh on deal volume. Industry revenue is estimated to grow by 1.6% in 2011-12. During the preceding five years, the UK Private Equity industry revenue is estimated to have contracted by 3.8% per annum to reach GBP1.4 billion in 2011-12.
According to IBISWorld analyst, Steven Connell, conditions in the UK Private Equity industry are forecast to improve over the next five years as debt markets improve, buyers return to the market and private equity firms exploit large cash balances and cheap valuations to add assets to their portfolios. “Regulation poses a threat to the industry, with banking reforms and changes to takeover laws expected to increase borrowing costs and make it harder for private equity firms to engage in leveraged buyouts,” says Connell. IBISWorld forecasts industry revenue will increase at an annualised 4.0% over the next five years, reaching about GBP1.7 billion in 2016-17.
