Q1 activity hits five-year low

The data indicates the UK has had a particularly rough start to the year despite increased optimism about the industry's ability to invest.

Overall, unquote" recorded 82 deals during the first three months of 2013 – a 37% fall compared to the 131 seen in 2012 (the highest Q1 figure since 2009.).

While 2012 was a particularly good year for UK private equity, the 2013 figure is lower than any year in our five-year sample, even dipping below the first quarter of 2009, which saw 92 deals. To put this in context, Q1 2009 began just months after the collapse of Lehman Brothers which put many deals on hold abruptly.

While the blame for 2009's dearth of investment activity can be fairly pinned on the fallout from the financial crisis, it is somewhat harder to determine why the UK market has struggled so much during the first quarter of this year.

However, a closer look at the economy and industry in general reveals some factors which could be impacting on deal numbers.

Firstly, while the UK might not be mired in a currency crisis as its continental neighbours are, it is becoming increasingly evident that the British economy has failed to build any momentum. It is thought an unprecedented triple-dip recession will be avoided when the Office of National Statistics publishes its Q1 GDP figures, but only just.

Faith in the UK's ability to make a significant recovery in the coming years is eroding rapidly, with ratings agency Fitch announcing on 19 April that it will cut the UK's credit rating from its coveted AAA to AA+.

The dour economic outlook could certainly be putting some players off investing, particularly foreign funds, but current goings on in the industry could be equally significant.

With many of the boom year vintage funds now approaching their divestment periods, a lot of GPs will be focused on the exit market, rather than new acquisitions. This has been fairly evident with large numbers of exits throughout Q1 recorded by unquote" and a significant revival in the number of private equity-backed IPOs.

Secondly, the fundraising cycle means many private equity houses will now be looking to raise their next fund. Many have already started and more are expected to launch new funds this year and next.

This combination of factors means the market is highly focused on exiting existing portfolio companies to maximise returns for investors and convince them to back the GP's next fund. Likely this has also shifted focus away from making new investments, though the difficult economic environment is also playing its part.

In terms of the value of investments, 2013 is not quite so bad. So far, €2.33bn has been invested, significantly higher than the paltry €593.22m seen in 2009. However, this is still well below other years, and less than a third of the huge €8.17bn's worth of investment seen in 2012.

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