UK exits on hold in Q1

There were just 36 divestments in the UK – excluding partial sales and receiverships – in Q1 this year, matching the decade-low figure seen in the second quarter of 2009. The figure is also less than half the number of divestments seen in Q2 2014, which saw a decade high of 80 exits.

"It is important to bear in mind that 2018 was not far off being a record year for exits," says Marcus Archer, a partner and head of business services at Clearwater International. "It was a very hot market for good quality businesses generating EBITDA in excess of £5m. Multiples were high and banks were supportive, which was driving strong exits, so a lot of funds took the opportunity to offload businesses of scale that were performing strongly. I suspect part of the reason activity fell away in Q1 of this year was because of a correction following the high volumes of 2018."

Indeed, with 70 exits recorded, Q2 2018 was the sixth most active quarter over the course of the past 10 years. Similarly, H1 2018 produced just 18 transactions shy of the decade's peak level of activity: 142 exits in H2 2014. However, as the end of the year approached, the market showed signs of cooling. The 46 divestments completed in Q4 was the joint-fifth lowest quarterly total in 10 years, as the UK moved towards the original 29 March deadline for Brexit negotiations.

"Partly, the high levels of activity earlier in 2018 were down to people wanting to realise an exit ahead of increased Brexit uncertainty," says Archer. "Was it going to happen at the end of March and, if so, what impact would it have on the M&A market and multiples? So if funds had decent businesses, they wanted to take the opportunity to exit during 2018. Not many people will have been launching processes in Q4 or Q1 with a completion at or around late March-early April."

Trade-deal-free?
A notable feature in the drop off of exit activity in Q1 2019 is a decline in the number of trade sales. There were just 15 trade sales in the first quarter of this year, the joint lowest quarterly figure in 10 years and considerably below the mean of 26.8 per quarter since Q2 2009. In contrast, the total of 13 secondary buyouts was almost in line with the average of 13.8 per quarter over the same timeframe.

"There are sector-specific dynamics at play," says Archer. "There is some softness in appetite from trade buyers in Europe when it comes to UK-based industrial services assets, which is likely to be specifically Brexit-related. Demand is still holding up from American buyers and some Asian buyers. Additionally, the secondary buy-out market continues to be supported by debt funds, which are hungry to deploy capital. Unless there is a clear strategic reason to do so and real synergies, trade buyers are sticking to what they perceive to be fair market multiples, and private equity funds have been successfully outbidding trade buyers for good businesses supported by the availability of debt and because of their own need to deploy."

With the deadline for a Brexit agreement now postponed until 31 October, uncertainty is likely to persist for some time. It is far from guaranteed that a further Article 50 extension will not be negotiated, should a political consensus not have been reached in time. However, Archer implies that fund managers are growing accustomed to the wider economic uncertainties.

"I'd expect to see exit activity pick up again towards the end of 2019," says Archer. "A lot of mid-market practitioners are already seeing increasing levels of activity again, whether that be private equity exits or primary buyouts. This quarter will also likely be a bit quiet in terms of completions, but we have been pitching a lot and will be launching a number of processes shortly before or after summer. People are beginning to conclude that Brexit is so unpredictable that, rather than putting life on pause, the sensible course is to carry on as normal. What many people are more concerned about is a potential change in government."

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• Topics
• Exits
• UK / Ireland
• Clearwater
• Brexit
• United Kingdom
• Secondary buyout
• Trade sale
• Unquote Data