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Lower mid-market recovery continues at pace in 2011

The UK has reinforced its position as the preeminent market for private equity investment in Europe, with activity in its lower mid-market having continued its strong recovery in 2011 to pre-recession levels of almost 100 deals.

In the face of notable macro-economic challenges, the segment’s robustness was highlighted as UK aggregate buyout volumes and values increased significantly compared to the previous two years.
Lyceum Capital and Cass Business School’s UK Growth Buyout Dashboard, the quarterly analysis of UK-headquartered private equity control deals in the GBP10 to GBP100 million enterprise value space, reveals 44 per cent growth in the total number of transactions last year to 91, compared to 63 in 2010 and 34 deals in 2009.
The total value of the deals also continued to improve in 2011, more than trebling over the past three years. Aggregate values were in excess of GBP3.4 billion last year compared to over GBP2.2 billion in 2010 and just above GBP1.0 billion in 2009.
These strong year-on-year increases in the lower mid-market indicate that, despite the Eurozone uncertainty and limited domestic macro-economic growth, the segment produces quality investment opportunities with significant value-generating potential for shareholders.
Transactions in the GBP10 to GBP50 million value range continued to dominate in 2011, comprising almost 80 per cent of all deals in the lower mid-market, as they did in 2010, and the average deal value increased slightly to GBP38 million, compared with GBP35 million in 2010.
Management buyouts (MBO) comprised the majority (57) of lower mid-market transactions in 2011, representing 63 per cent of the number of deals. This proportion is a modest decrease on the previous year when 47 MBOs made up 75 per cent of all transactions.
Secondary buyouts grew considerably last year, from 10 in 2010 to 25, as certain private equity investors with dry powder identified growth opportunities in firms primed under the private equity ownership model in the smaller buyout space.
Public to private (P2P) transactions also increased to eight in 2011 – four of which completed in Q4 – up from just three in 2010, with shareholders in AIM-listed companies recognising the need to seek private equity capital in order to pursue growth opportunities.
Technology, media and telecommunications (TMT) was the stand-out sector in the lower mid-market in 2011 as it represents one of the few remaining areas of non-cyclical growth and that is likely to continue. 26 deals completed, contributing to 29 per cent of completed transactions for the period. Given that there were 11 TMT industry buyouts a year earlier and just four in 2009, the sector’s SMEs have played a key role in the segment’s continued revival, with growth in innovative IT solutions, such as cloud computing and mobile business applications, driving the trend.
Lyceum Capital made a GBP100 million commitment to the IT sub-sector of TMT in 2011, investing in accounting and enterprise resource planning (ERP) software and services business Access in March, managed IT services provider Adapt in September, and global digital security software company Clearswift in December.
The industrials sector also saw a significant jump in deal flow, with the frequency of transactions more than trebling to 17 from five in 2010. There were 16 deals involving business support services firms, down marginally from 17 the previous year, as the industry firms, particularly those with exposure to growing international markets, remained popular with mid-market private equity investors.
There was a modest (11 per cent) increase in the number of exits in 2011 (49) compared to the previous year (45), as shareholders realised the value of assets for investors, having achieved improved visibility of earnings and overall corporate performance following a challenging post-recessionary period and the uncertainty throughout the European debt and equity markets.
In-line with private equity investment trends, exits to secondary buyouts rose from 10 in 2010 to 25 in 2011, marginally displacing trade acquirers in the buyer pool, which acquired 24 of the disposals, down from 33 a year earlier.
The IPO market remained closed in 2011, with no offerings completed. There has been just one lower mid-market IPO exit in the last three years.
Andrew Aylwin (pictured), Partner at Lyceum Capital, says: “The lower mid-market was unquestionably the private equity success story of 2011.  Its performance is a corollary of the segment’s companies bucking the macro-economic trend and continuing to achieve decent growth.
“The recovery of UK lower mid-market deal volumes, when overall activity here and across the EU fell, highlights not only the quality of the segment as a destination for private equity investment, but also the undeniable demand for growth finance that many other sources cannot adequately service.
“Contrary to other data such as BDO’s most recent Q3 Private Equity Price Index, which notes an average price/earnings multiple of 15x, we completed investments over the same period in TMT-market companies with excellent long term growth prospects at much lower multiples. Companies that require new capital to support growth continue to welcome approaches from potential partners with a demonstrable track record of delivering significant value.”
Scott Moeller, Professor in the Practice of Finance at Cass Business School, says: “In contrast to the negative economic news of the past quarter generally, the improvement in activity in the lower mid-market in the UK is encouraging.  This report demonstrates the resilience of this particular sector. As important, it is perhaps a leading indicator of an improvement in future quarters not only in this smaller buyout market but also in other parts of the UK economy – as this critical sector is often the “canary in the coal mine” because of its sensitivity to general business trends.”

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