UK private equity firms are preparing to step up their use of bolt-on acquisitions as the global credit crunch reduces company valuations, but they
UK private equity firms are preparing to step up their use of bolt-on acquisitions as the global credit crunch reduces company valuations, but they are delaying the sale of their own investments as uncertainty on pricing persists, according to a survey from BDO Stoy Hayward Corporate Finance.
The credit crunch has resulted in a decline in the prices private equity firms will pay for businesses, according to 96 per cent of private equity investors surveyed for BDO Stoy Hayward’s Private Equity Mid-Market survey, which explores the views of 100 UK mid-market private equity firms and their portfolio companies.
However, private equity firms are divided on how far valuations have fallen, which is contributing to uncertainty over pricing. While 27 per cent of respondents said they had lowered company prices by more than 20 per cent, 36 per cent said they had reduced prices by just 5 to 10 per cent.
Economic conditions have also increased the length of time that private equity firms are holding onto their investments. The survey found that 91 per cent of private equity firms now expect their holding periods to increase as a result of the credit crunch and 71 per cent said they had already delayed commencing a sale process. The delay exceeded a year for 95 per cent of those that had held back sales.
However, private equity-backed businesses are keen to make acquisitions, with 51 per cent expecting to acquire another business prior to being sold on. Among private equity respondents, 97 per cent expect at least one in four of the companies in their portfolio to undertake a bolt-on acquisition prior to exit, while 70 per cent expect bolt-on acquisitions for at least half of their portfolio companies.
“The private equity market is deeply divided on company valuations and uncertainty about value has led to sales being put on hold,” says BDO Stoy Hayward corporate finance partner Alex White.
“This could be a mistake if valuations converge downward in the next few years. There is therefore a strong argument for company owners to sell now despite the uncertainty, because a significant number of buyers are still paying reasonable prices.”
“Although private equity company sales are slowing, there is massive demand to bolt on acquisitions to existing investments. There are more than 1,200 mid-market private equity portfolio companies, and bolt-on deals will underpin a lot of M&A in the mid-market for the next few years.”
