Reputation issues linger despite value creation

Alice Murray
11 November 2014

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In previous years it was seen as the cause of subdued fundraising, or the driver behind tougher regulation - private equity's reputation issue is now increasingly blamed for depressed dealflow. Alice Murray reports

At the BVCA Summit held in London in October, the industry's reputational issue reared its ugly head once again. Garry Wilson (pictured), partner at turnaround house Endless, said: "The industry does have a reputation issue. It is still a big hurdle." He went on to say the asset class is not concerned enough about tackling the issue and that when he speaks to industry peers he is generally told that "it is called 'private' equity for a reason".

Suspicious minds
Wilson asserts that business owners are suspicious of private equity: "We have a hurdle to jump every time we meet a business." He feels that depressed dealflow should act as a motivator for the industry to address this long-term issue.

While many speakers at the summit echoed Wilson's sentiment around subdued dealflow, with Warburg Pincus's managing director and head of Europe Joe Schull telling delegates that innovation is now crucial for origination, a glance at recent figures for deal activity in the UK shows the picture on the buy-side does not seem that desperate.

According to unquote" data, Q3 deal activity was only slightly lower compared with the same period in previous years. Across all deal types (early-stage, expansion, acquisition finance, buyouts and SBOs) there were 121 deals recorded, against 45 exits. Looking to the same period in 2013, there were 139 deals recorded across all deal types and 58 divestments. Looking further back, in Q3 2012, there were 129 transactions recorded and an impressive 75 exits.

Drilling down into 2014's year-to-date numbers, the latest unquote" UK Watch, produced in association with Corbett Keeling, shows activity looks stable so far this year, particularly for early-stage, expansion and buyout deals worth less than £150m. For deals in the sub-£150m category, with more than 100 investments, transaction activity so far this year is fast approaching 2013's total. However, it is the plus-£150m segment that is suffering, in both value and volume terms. It appears as though 2014's deal numbers will be more akin to those witnessed in 2011, with fewer than 20 deals completed in this category so far, versus the 38 done in all of 2013.

What should be of more concern are the exit numbers. The most common complaint among deal-doers at the moment is rising prices and while this understandably causes difficulties when deploying cash, swelling asset valuations should be driving divestment numbers. Though the IPO window may now be drawing to a close, the industry certainly took advantage of this exit route while it was viable, with notable listings including FDM Group, Zoopla, B&M Retail, AA/Saga and Just-Eat. Looking at Q3 exits alone, it is clear IPOs are slipping away, with only two completed over the three-month period, while trade sales accounted for the largest number of divestments, racking up 14 in the most recent quarter.

Exit priority
With these factors in mind, instead of the industry finding better dealflow by tackling reputation issues, what seems a more urgent task is making the most of the current high asset valuations and capitalising on the favourable exit environment. Only then can GPs use the benefits awarded by divestments to subsequently deal with the issue of reputation.

As Wilson highlighted at the summit, of the hundreds of management teams that have experienced private equity ownership, many have become millionaires: "Private equity has made a huge difference to these people's lives and to the lives of their families." Looking at the industry's challenges from this perspective will better showcase the individual prosperity awarded by private equity and, in turn, could create more opportunities.