Private equity investing will be the key in 2012

Jan 5 2011 by Peter McCusker, The Journal

INCREASED private equity investment is expected to be a key feature of the North East dealmaking market in 2011, say some of the region’s leading corporate finance experts.

Rod Wilkinson, head of corporate finance at KPMG in Newcastle.

WE have a very strong pipeline – stronger than last year at this time – but the deal- doing environment is no easier and I think the banks are at least as cautious.

This will see the continuation of the trend of transactions taking longer, with a more involved level of due diligence and legal process.

There remains plenty of private equity funding. 2009 saw little private equity investment, whereas this year most funds have invested in at least one or two transactions.

Having said this, because of low activity levels in 2009 many private equity houses are still under pressure to catch up with their investment cycle – a lot of people raise money in 2008 and made no investments for 18 to 24 months.

Therefore, this offers good opportunities for businesses with growth plans and I would expect there to be some transactions based on exciting plans in growth sectors.

Growth sectors which are particularly attracting investment are healthcare, oil and gas/subsea, renewables and IT/software services. Most have attractive niches.

Shawn Bone, partner, BTG Corporate Finance, Newcastle.

The improvement in 2010 transaction volumes has been primarily driven by an increase in both trade buyers and private equity buyers returning to the market during 2010 seeking to acquire businesses before valuations recover.

The number of sellers in the market has also increased driven by shareholders who have not been able to exit since mid 2008 when the M&A markets declined significantly.

The prospect of further capital gains tax rises and in some cases shareholders looking for the shelter that being part of a larger organisation can bring given the difficult trading conditions many businesses have experienced over the last two years.

We are also seeing an underlying increase in mid-market transactions ranging from £5m to £100m and that accounts for a large percentage of the transaction activity in our region and the other regional markets.

As for pricing there has also been a trend up in private equity pricing reflecting some moderate recovering in the banking market and renewed appetite from private equity firms to make investments.

There is still some uncertainty over the shape and speed of the UK recovery but there are signs that the transactional market continues to grow in confidence.

Combined with an increase in valuations, which is more evident in the price private equity firms are paying for businesses, there is reason to be optimistic about the prospects for a sustained recovery in the M&A markets into 2011.

Craig Swinhoe, a partner in the corporate finance team at Muckle, Newcastle.

2010 remained, for many, a difficult year for doing deals. Although there has been a definite upturn in deal activity compared to 2009 the overall number and value of deals has, in the main, remained lower than those which were being seen pre-2008.

There was also a definite spike in deals prior to anticipated changes in Capital Gains Tax and entrepreneurs relief in the budget and emergency budget.

We have seen a mix of high-profile disposals of long-standing clients, repeat acquisition work for our acquisitive clients (including a number of overseas buyers), traditional SME deals, early stage spin-out and investments and some major bank refinancings.

The lack of available funding continues to have a significant impact on deal numbers. Other than acquisitive corporates and overseas buyers who now see value in the market there still seems to be a scarcity of funds from traditional sources.

Although we have seen a number of major refinancings, outside of a number of particular sectors, there still seems to be a limited amount of new lending on deals and a number of deals are relying on an element of vendor financing to make them happen.

The new Finance for Business North East Fund (FBNEF), the region's £125m “superfund”, is now in operation and a significant number of investments are being made out of its various funds. The FBNEF, together with local business angels, are likely to provide a valuable source of funds for deals in 2011.