A private affair

With publicly-listed assets trading at significant discounts to their 2007 prices, private equity firms are sniffing around for bargains. The difficulty for private equity firms can be convincing management that coming off the market will benefit the business in the long term, especially if the company is able to generate the necessary liquidity as a listed entity.

In recent years, AIM has been a reliable source of dealflow for private equity firms and research conducted by Noble Group has identified a group of AIM-listed companies which could attract a private equity bid. (See table below.) Taking recent AIM delistings as its starting point, the research identifies low debt to equity ratios and a price/earnings ratio no higher than 10 as central to the attractiveness of an AIM-listed company to be taken private. The problem many companies face on AIM, and one which has yet to be solved, is the lack of trading liquidity.

This lack of liquidity is often maligned by company bosses, but John Llewellyn-Lloyd, CEO of investment banking at Noble, believes this lack of liquidity is not a bad thing for the M&A market more broadly. "The whole point of AIM is to act as a recycling market. It is natural for companies to come off the market if they are unable to generate liquidity as a listed company. With options and bonuses related to share price a private equity investment is also financially attractive if the stock is suffering, as well as providing much needed liquidity," he says.

Private equity players agree that AIM could be a reliable source for deals in the coming months, but GPs will be turning to it less out of choice and more out of necessity. "GPs need to allocate capital to keep their LPs happy and justify their 2% fee. With the secondary buyout market all-but closed for the next few months, firms will be looking for alternative sources of dealflow and AIM will be one of these sources," says one pan-European adviser.

The attractive pricing and low debt to equity to be found on the books of some AIM assets is not the only attraction for buyers, especially those from the US, says Llewellyn-Lloyd. "Private equity players from the US will be attracted to AIM because of the level of visibility you get from AIM-listed companies, as well as their experience of take-private deals."

The number of take-privates in the UK in the first half of 2008 has remained stale in comparison with the first half of last year even though total deal volume has fallen away rapidly, bearing out the theory that private equity is turning its attention to the public markets. In addition to these completed deals there are a number of offers currently awaiting approval from shareholders, which are likely to boost figures for the second half of the year.

Apply the same approach to the FTSE 250 as the Noble research did for AIM and one can identify a small selection of companies that would appear well-placed for an approach from a large buyout house. Permira's recent EUR2.3bn offer for NDS, a News Corp affiliate and maker of technology for pay television providers, shows that banks are willing to lend for good businesses and a take-private timetable need not be a deterrent.

Alternative exits

Given the limited access to finance and the impact this has on availability of purchasers, an alternative market presents an interesting exit option for SMEs and private equity investors. In the case of Spain, this possibility has become an option with the Mercado Alternativo Bursatil (MAB). The MAB offers an exit route, at least for investments in companies with an expected market capitalisation upwards of EUR20m that have or about to reach maturity under the present market conditions.

Promoted by Bolsas y Mercados, the holding company of the Spanish Stock Exchanges, the MAB has been in operation for over two years, initially open to SICAVs (May 2006) and to regulated private equity operators (June 2007), and since March this year to SMEs. The MAB offers SMEs access to capital markets at lower budgetary, human and technical costs than senior markets. Regulatory compliance leeway comes under the role of registered advisers who check compliance with the listing requirements, elaboration of listing documentation, and transparency information reporting and deadlines.

The MAB creates the opportunity for potential transnational investment and global inter-connectivity in SME capital markets. This is not a real option for minority investors but rather for professional investors fully aware of the risk and fluctuations involved. It offers SMEs access to liquidity from equity capital markets; transparency and a greater investor base.

"There is real interest in the MAB but so far, and even more under the current environment, there is some relunctance by (Spanish) issuers and investors as no one is keen on being the first to explore uncharted territories," says Miguel Garcia Stuyck, counsel at Lovells capital markets team in Madrid. The model has proven to work as illustrated by London's AIM. In Spain however, the MAB has yet to be "tested" and therein lays the problem since the investor culture is more conservative than in the UK. According to experts, the first quarter of 2009 could well see the first companies ready to be listed; until then there is no alternative but to wait.

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• Southern Europe