PRIVATE equity has been priced out of the deal market by cash-rich trade buyers in the first half of the year with debt-fuelled UK deals down by almost 50% on the previous six months.
The North East has seen little activity in this sector with just one private equity-backed buyout so far this year, although both London and the South East saw signs of a private equity revival.
The overall value of UK private equity-backed management buyouts fell in the first half of 2011 to £5.7bn compared to £10bn in the second half of 2010, according to the latest data published by the Centre for Management Buyout Research.
The exit market in the UK performed well in the first half of 2011, overtaking the level of investments for the first time since 2006, at £5.8bn, said the research sponsored by Barclays Private Equity and Ernst & Young. Increased activity in South East England is beginning to rival London’s dominance with 17 buy-outs in the first half, totaling £1.3bn, and accounting for 23% of total deal value. The total deal value in London was £2.3bn, representing 40% of total value.
The North East continued to struggle with the completion of just one deal valued at around £1m in the first half of 2011.
This saw the management of Team Valley-based Northumbrian Fine Foods purchase the company with support from London-based private equity firm CriSeren Investments and Food Investment Group, of Aberdeen.
Similarly, there has been very little deal activity in Northern Ireland, with only one £2m deal completed.The East Midlands witnessed no deals.
Mark Hatton, Newcastle senior partner at Ernst & Young, said: “The deal market is quite active now – certainly well up on this time last year.
“However, the North East market has far more sellers seeking an exit than buyers seeking to grow by acquisition.
“The sellers have been finding that trade buyers are prepared to pay significantly more than private equity, so the vast majority of the deals have been to trade.
“I suspect that private equity realise they have missed out on quite a few deals by being outbid by trade buyers and so private equity may well start to increase the prices they are prepared to pay so they remain competitive.
“Trade buyers are often cash-rich (so don’t rely on raising debts to fund purchases), their cash is earning very low returns and often as quoted companies they are currently valued at relatively high multiples of earnings.
“So they can afford to buy at ‘good’ prices and still enhance their earnings and hence their share prices.”
Steve O’Hare, director at Barclays Private Equity in the North, said: “While there are a few large buyouts in the pipeline, it is very possible that buyout activity in the second half of this year will remain subdued.
“If this proves to be the case the UK buyout market will be operating at a level last seen in the late 1990s, but with much more committed capital waiting to be invested.”
