The overall value of UK buy-outs* fell by three quarters (72%) in 2009 to £5.5bn compared with 2008 (£19.7bn), representing a return to 1995 buy-out levels, according to the latest data published by the Centre for Management Buy-Out Research (CMBOR).

Highlights:

• The volume of private equity-backed UK buy-outs* in 2009 fell to the lowest level for a quarter of a century with 117 deals completed. The value of buy-outs for the year totalled £4.7bn, the lowest since 1995.
  
  
• There are some signs that confidence in the buy-out market is returning. Q4 recorded a 48% increase in the value of private equity-backed UK buy-outs totalling £943m, up from £636m in Q3, and a rise in the number of £100m plus deals. Five deals in the £100m to £250m range were completed in Q4 representing 85% of the total deal value in Q4.
  
  
• Small deals made up the bulk of buy-out activity in 2009 with 61% of deals under £10m. Deals in the lower-mid market (£10m to £100m) comprised 30% of the total number of buy-outs compared with 46% in 2008.
  
  
• Public to private (PTP) transactions slowed overall in 2009 but showed a significant upturn in Q4 with over two fifths (44%) of all PTPs completed in the final quarter. Four PTP transactions completed in Q4 with a total of nine PTPs in 2009. The public markets have been the largest source of deals this year by value, representing 40% of total deal value in 2009 (NDS at £1.2 billion made up the majority of this total).
  
  
• The manufacturing and business services sectors generated the largest number of deals in 2009. The TMT sector was the largest contributor by value totalling £1.5bn during 2009 although this figure is skewed by the £1.2bn buy-out of NDS Group.

“Overall the end of this decade has seen very low levels of buy-out activity, as expected, compared with a far more buoyant private equity market in 2006-2007. In addition, of the total recorded deal value of £4.7bn in 2009, £1.2bn related to one transaction - the buy-out of NDS Group.” said Christiian Marriott, Director at Barclays Private Equity.

“We have, however, seen an upturn in completed buy-outs in the fourth quarter which, along with the announcement of further buy-outs in mid-late December and several private equity-backed IPO prospects, indicates that 2010 should see an upturn in private equity activity. The flotation of Gartmore in December was the first private equity-backed IPO since 2007 which also suggests that confidence is returning to the public markets.”

Rise in businesses acquired out of receivership

“The number of businesses in receivership acquired by private equity firms has nearly doubled this year to a total of 20, the highest level since 1993. This demonstrates that there remains investment opportunities at relatively low entry multiples in companies with recovery potential.

“By contrast, the number of private equity-backed companies going into receivership has remained stable over the past three years, despite challenging trading conditions. 50 private equity-backed receiverships were recorded in 2007 compared with 53 and 55 in 2008 and 2009 respectively. However, fewer than 1% (0.88%) of total UK companies going into receivership were private equity-backed, as recorded in the first nine months of 2009.” **

Deal sizes increase in 2009

Marriott continued, “Overall deal sizes increased towards the end of 2009 - a further sign of confidence returning to the market. The average deal size was £45m in Q4 compared with £17m in Q3. Large buy-outs remain scarce, but there has been a slight increase during the year with only four deals over the £100m mark in the first half of the year, compared with seven completed in the second half.”

Significant rise in equity contribution in UK buy-outs

In 2009, the average equity contribution in UK buy-outs rose markedly from 48% of the overall deal structure in 2008 to 64%. By contrast, the proportion of senior debt has fallen sharply from 40% in 2008 to 31%. “This certainly reflected the tightening of bank debt earlier in the year but could also demonstrate that private equity firms willing to do deals are structuring these more conservatively. There appears to be a greater appetite for all-equity buy-outs including, for example, the take-private of Just Retirement.” said Marriott.

Limited appetite for secondary buyouts

Secondary buyout (SBO) activity in 2009 fell significantly with only 13 SBOs compared to 49 in 2008. However, by total value of deals, SBOs represented the second highest source of deals comprising 20% of all buy-outs completed during 2009.

Marriott added: “While secondary buy-out activity has fallen sharply, the average deal value for SBOs remains fairly large at £73.4m compared to an average deal value of £40m for all buy-outs. Many secondary buy-outs have been acquisitions of distressed assets, suggesting that as private equity firms reorganise their portfolios, private equity firms are selling these assets on rather than allowing these firms to go into administration.”

* The first figures provided of £5.5bn and £19.7bn refer to all UK buyouts (including those without a private equity sponsor). All remaining figures in the release relate only to private equity transactions.

** Total receivership data available for up to Q3 2009 only.