Freeze on credit puts brakes on buy-outs

Nov 16 2009 by Jez Davison, Evening Gazette

THE credit freeze has sparked a sharp decline in the region’s deal-making activity, new figures have shown.

In the first nine months of the year the value of private equity-backed buy-outs in the region fell by 60% to £65.9m compared with the same period last year (£166.5m), according to the Centre for Management Buyout Research (CMBOR). Just 12 buy-outs were completed compared with 24 for the first nine months of 2008.

The average deal value for the first three quarters of 2009 was just £5.5m, a 13% decline on last year’s figure of £6.3m and 41% on 2007 (£9.4m).

Analysts said the market’s slowdown had coincided with banks’ reticence to fund takeover deals following the near-collapse of financial systems around the world.

Anthony Platts, divisional director at investment manager Brewin Dolphin’s Teesside’s office, said: “Generally, credit was more readily available and cheap during the period up to 2007. That is not the case now.”

John Walker, director at Barclays Private Equity in the North, said the drop in deal values reflected the tightening of bank debt, and vendors’ reluctance to sell until profitability became more predictable and business valuations stabilised.

“Furthermore, private equity houses that are doing deals in the region are selecting and structuring these buy-outs more conservatively,” he said.

Earlier this year Deloitte’s North-east dealmaking team pulled out of the region, claiming the private equity market was “dying a death of a thousand cuts” as banks reined in their lending.

The paucity of affordable credit has also caused heartache for businesses that need cash to fund debt or capital expansion.

A new report by the British Chambers of Commerce (BCC) claimed that the £200bn injected into the financial system to boost lending under the Bank of England’s Quantitative Easing policy has not filtered through to Britain’s small and medium-sized businesses.

The organisation said 33% of companies reported that accessing finance had been more difficult over the past three months, a deterioration on the 20% reported in June.

Just 3% said the situation had improved.

As well as battling with continued lending constraints, the 400 businesses questioned in the survey were gloomy about general trading conditions.

Sixty-four per cent of participants said their biggest barrier to growth over the next 12 months was the lack of customer demand.

The BCC urged the Government to include in next month’s Pre-Budget report measures that will “encourage companies to invest and improve confidence”.

BCC director-general David Frost said: “Announcing that 2011’s planned increase in National Insurance contributions will be scrapped would be a good start.

“It is clear that the huge sums that have been injected into the financial system by quantitative easing are still not reaching small and medium-sized businesses in anything like the scale required for business to invest for future success.”

Recent figures from the Bank of England showed money growth shrinking by 0.9% in September - following anaemic 0.1% growth in August - despite its efforts to pump £175bn into the economy through quantitative easing.

Lending to businesses was down 0.1% and was 3.4% lower than a year ago, the figures showed.

Part-nationalised Royal Bank of Scotland and Lloyds Banking Group are under pressure to increase lending, having signed up £39bn in lending commitments to homeowners and businesses.

The Bank’s monetary policy committee voted this month to inject another £25bn into the economy over the next three months, taking the total amount to £200bn.