Northern lights: regional dealflow to prop up UK PE

Investing across the various regional market in the UK has become the new hot area of investment, as more and more previously London-centric private equity firms feel they have been missing out on the action in an otherwise slow investment climate.

Houses that already employ a cross-regional strategy remained disproportionately active in 2009, such as LDC, which completed a total of 16 deals last year, more than any other investor. Others are now following in their wake: Gresham, for example, has just announced the opening of a new office in Bristol, as it too intends to build its regional remit.

The trend is particularly noticeable in the Northern regions, which have seen relatively strong activity in the last year. A case in point is Yorkshire and the Humber, which saw deal numbers remain fairly stable in 2009, dropping by just one deal from nine to eight, while the value shot up from £86m to £155m.

London, by contrast, saw volume decrease from 53 to 39 deals, while value fell from £847m to £494m.

This success, however, has not necessarily been without its hiccups, as the regions have seen their share of challenges: “The bread and the butter £20-30m deals that have kept the local market going for years have not been around recently and I’m not sure they will come back in volume for some time to come,” says KPMG's corporate finance head of Yorkshire, Christian Mayo.

But areas like Leeds and Manchester have remained busy, suggesting that there is a market for the right deal. Further, when the right deal comes along, it is often priced such that vendors will part company with their asset. “High quality businesses still seem to be generating vendor expectations of high multiples. There don't seem to be many average businesses on the market attracting mid-range prices,” says Tony Norwood of LDC in Leeds.

Notwithstanding this strong performance, economic uncertainty remains and it is still unclear how 2010 will pan out overall. The only fact we know for certain is that, as already been proven, the regional market has the will and the makings to survive: “The regions never got as frothy as London did and therefore the regional market has always been more resilient,” says Jonathan Jones, head of Hammonds in Leeds.

As a result, some are expecting bigger private equity houses in London to come down on the totem pole and invest more heavily into the regions. “It is a matter of private equity houses missing dealflow. They can’t just sit in London and wait for the phone to ring anymore. It’s reflective of where the activity is,” explains Jones.

An extended version of this feature will appear in the next issue of unquote" – out 8 February.

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