UK PE market defies recession

Figures from the Office for National Statistics (ONS) show the UK's economy shrunk by 0.2% in the first quarter of 2012, following on from a 0.3% shrinkage in Q4 2011, putting the UK in recession.

Economists had already widely forecast poor growth figures, though many expected a small rise in GDP of around 0.1% rather than a contraction. The UK was previously in recession in 2009 after the banking crisis erupted.

However, despite these problems the UK continues to see strong M&A activity, and buyout houses are experiencing strong dealflow in the first quarter of 2012 after a tough end to last year.

This is most evident in the mid-market (see chart), which has experienced a boom in activity this year. Since January unquote" has recorded 21 buyouts valued between £50-500m, and preliminary figures for April show it is the strongest single month over the past year with eight deals worth a total of £837m recorded so far.

This follows on from strong first quarter performance, with January and March each recording over £650m worth of deals. However, it remains to be seen whether this momentum can be maintained. Europe's buyout market was performing strongly last year but suffered in the second half as financing dried up and the Eurozone crisis accelerated.

Earlier this month, Ernst & Young's Item Club urged businesses to start spending the excess cash they have on their balance sheets to assist in economic recovery. Years of caution have led to many firms having substantial reserves, but the return of recession may make them even more cautious. This could be a double edged sword for private equity, reducing competition in the deal room but potentially hampering the exit market and prospects for portfolio companies.

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• United Kingdom