The overall value of UK buy-outs* fell by over three quarters (77%) in the first nine months of 2009 to £4.3bn compared to the same period last year (£18.5bn) 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 Q3 2009 fell to the lowest level for a quarter of a century with only 31 deals completed. The value of buy-outs in the same period totalled £556m, the lowest for 15 years.
  
  
• The value of private equity-backed UK buy-outs* totalled £3.6bn in the first nine months, dramatically lower than the overall yearly figures for 2008 (£18.2bn) and 2007 (£43.4bn).
  
  
• Buy-outs from family and private owners represented almost a third of all transactions. Businesses bought out of receivership provided the third highest source of deal flow this year.
  
  
• Two thirds of buy-outs so far this year have been under £10m. The lower-mid market (£10m to £100m) has seen a significant decline in activity now only making up a quarter (26%) of all buy-outs compared to 46% last year.
  
  
• The manufacturing and business services sectors have generated the highest volume of deal flow so far this year with 21 and 16 buy-outs respectively. By value, business services makes up almost a third of all buy-outs.
  
  
• Private equity buy-outs as a percentage of overall UK takeover activity has fallen by a fifth (21%) by value from last year. In 2009 so far, they represented 26% by value and 32% by volume. This contrasts markedly to 2007 when 62% of all takeover activity by value consisted of private equity-backed buy-outs.

* The first figures provided of £4.3bn and £18.5bn refer to all UK buy-outs (including those without a private equity sponsor). All remaining figures in the release relate only to private equity transactions.

“The private equity market is not yet showing any significant signs of recovery with the overall value of buy-outs at a level last seen in the mid-1990s,” said Christiian Marriott, Director at Barclays Private Equity.

Resilience of mid-market being challenged

Marriott continued, “It is not surprising given the current environment, that we are seeing far fewer £500m plus deals – only two so far this year compared to eight in 2008 and 14 in 2007. Whereas the mid-market had been holding up reasonably well, this has been squeezed throughout the year. There have only been four deals in the £100m to £500m range this year (2008: 29) and 24 in the lower-mid market (£10m to £100m) compared to 111 last year (2007:153). This has obviously had a considerable impact on the average buyout value which has fallen from £134m in 2007 to £40m so far this year.”

There have been far fewer businesses acquired from family and private owners, as well as a considerable decline in the number of PTPs this year – falls of three quarters (73%) and two thirds (67%) respectively, reflecting the overall decline in buyout activity. By overall value, PTPs fell by 82% totalling £1.3bn in 2009 so far (of which £1.2bn relates to one transaction).

Increase in businesses acquired from receivership by private equity

Marriott continued, “By contrast, the number of businesses in receivership acquired by private equity firms has risen by 55% this year to 17, the highest level since 2001. This shows that there are investment opportunities at relatively low entry multiples in companies with recovery potential: private equity is able to provide capital and impetus by getting these businesses up and trading again.”

Rise in equity contribution in UK buy-outs

In 2009, the equity contribution in UK buy-outs has risen markedly from 46% of the overall deal structure in 2008 to 60%. By contrast, the proportion of senior debt has fallen sharply from 40% in 2008 to 33% so far this year. “This undoubtedly reflects the tightening of bank debt but could also demonstrate that private equity firms willing to do deals are structuring these more conservatively. Whilst this could raise a concern amongst investors, these deals are being done at much lower entry multiples with the chance of good realisations when market conditions improve and, in a tough market, selection criteria are often more stringent.”

Current market conditions have made it extremely difficult for private equity firms to successfully exit businesses. The number of investments realised in the nine months to September (excluding receiverships) dropped to less than a third of their 2008 level at 30 so far this year. This compares to 159 over the first three quarter of 2007. There has also not been a single private equity-backed IPO since 2007.

Vintage years post-downturns shows lowest level of receivership

The number of private equity-backed businesses going into receivership so far this year has increased slightly to 41 compared to 36 in the same period last year. Marriott added: “Whilst the economic environment is still forcing a number of private equity-backed businesses into receivership, this remains a very small percentage - 0.8% of the overall number of corporate receiverships across England and Wales. Equally, there have been fewer private equity-backed receiverships this year than there were in the last downturns in 1990 and 2001, despite the greater number of private equity deals completed in the run up to this crisis.”

“History shows that the vintage year with the lowest number of receiverships was 1991 following the 1990 downturn. Similarly in 2003, numbers fell coming out of the 2000/1 downturn suggesting that periods of economic difficulty may encourage more prudent investment from private equity backers.”

Sharp fall in secondary buy-outs

Secondary buyout (SBO) activity in 2009 has fallen sharply with only 11 SBOs compared to 42 in the same period last year. Marriott continued: “Many of the SBOs this year have been rescue deals or distressed buy-outs (DBOs) where the business – or its parent - was at risk of going into receivership. In terms of the overall value of exits, it is no surprise that this will be dramatically lower this year - £1.2bn so far compared to £9.2bn last year. The largest exit in Q3 was the £553m sale of Wood Mackenzie to Charterhouse Capital Partners.”