Finding your way out

There has been roughly one private equity exit per issue in the last three editions of unquote". A lack of confidence and debt combined with a surplus of caution and fear mean the market has not been this slow since we began covering divestments. Of course, there are actually far more exits in the way of write-offs, however unquote" does not receive upbeat press releases about these, and the administrators are paid too much by backers to unpurse their tight lips to hungry journalists.

Since the onset of 2008 there have been 86 exits in the UK, according to data from unquote" database Private Equity Insight. The first two quarters saw roughly a dozen each, with this volume halving by Q3 and slowing to a mere trickle of late. Also of note, despite the distinct lack of credit available, secondary buyouts continue to account for a weighty 45% of exit activity this year (see graph) - the largest proportion.

"All rational private investors headed for the checkout tills in the first quarter of this year to beat the changes in capital gains tax," says David Ascott, partner at Grant Thornton. "This had the effect of bringing forward a lot of activity that might have occurred later in the year," he continues, hinting that the current slowdown may be exaggerating the true impact of the current credit crisis.

That said, the limited number of recent exits have hardly been stellar. The sale of Lucite International by Charterhouse Capital may have seemed a roaring success, with its hefty $1.6bn price tag. However, wise men on the street whisper that Charterhouse did not actually make much money on the deal when it was sold to Mitsubishi Rayon, Lucite's major Japanese competitor. "[Charterhouse} may have even lost money," one source said.

The last sizeable (and lucrative) exit was that of Catalyst Investors' and RIT Capital Partners' sale of MessageLabs for £397m to Symantec. The initial deal, done by Catalyst alongside Madison Dearborn for £25m in 2001, may show that it is the small deals doing well (in fact this issue of unquote" does not feature any deal larger than £5m).

Painful pricing

What Symantec does demonstrate however, is that though difficult, it is not impossible to offload your assets. "It is pretty tough, but for the right deals it is entirely possible to sell an asset," says Peter Brooks of LDC, who has an exit in the pipeline at the moment. "However you are likely to get low, not just poor, prices. Certainly in relation to recent history."

Brooks' target is undergoing a management transition, which requires succession planning and thus needs action now, not when the credit markets are more convenient or sentiment more favourable. To avoid forgoing a handsome return, LDC will hang onto a major shareholding of the company. Explains Brooks: "We are running a process right now, but we may not get the price we think it is really worth. A partial sale with considerable rollover or a retention will solve the management problem, but allow us upside." A slew of such partial exits may be on the cards for 2009.

Much of the exit activity the market will see in the next few months will be driven by non-monetary reasons, as per the above example. "We have some transactions in our pipeline that involve generational or life changes, such as someone choosing to move abroad or so on," Brooks continues.

A straw poll of vendors with assets in the pipeline reveals a unanimous agreement that trade is likely to pay the bigger bucks these days. Foreign buyers are especially attractive at the moment: "Any overseas buyer is massively better off today as we are now a cheap currency," says Ascott.

When your editor asks when the markets should improve, answers are mixed, with five professionals giving seven answers. However, general consensus says the middle of next year. "Anyone expecting a January onslaught as a result of banks opening their wallets is delusional," one source says. Indeed it will be a long winter.

Exits as a way in

A lot of private equity dealflow is exits from another point of view: private vendors getting out of their own businesses. However the problems plaguing private equity sellers right now - finding a suitable buyer, good price, etc - are precisely those facing non-private equity vendors. This contributes to the very slow market for deals as well as exits.

Nowadays, most opportunities on the block are distressed, though juicier prospects may be on the cards: "Right now the majority of spin-offs from corporates are of poor quality, however foreign owners of European businesses that need cash may start shedding some quality assets," points out Charlie Johnstone of ECI. This situation of a "stressed" parent offloading a sound part of itself is what many deal seekers are hoping for.

Taking time

Charterhouse's sale of Lucite illustrates the blood, sweat and tears an exit requires in today's climate. In the summer, before things went from bad to worse, Charterhouse was speaking with Deutsche Bank and Merrill Lynch on grooming the business for a sale or flotation - despite the fact that the last sizeable (£1bn+) flotation on London's main market was in the spring. At that time, the backer was looking at a valuation in the neighbourhood of $2.5bn.

Indeed the buyout giant did not have an easy run of it; nearly three years ago the business was still valued at $2.5bn. In early 2006, following a number of unsolicited bids, the backer appointed Deutsche Bank to run a beauty parade of potential suitors. This was ultimately abandoned, with poor market conditions cited as the cause. Later that year, Lucite received a EUR25m fine from the European Commission for anticompetitive behavior in the European polymethyl methacrylate (PMMA) market.

Another business proving tough to offload is that of Reed Business Information, the B2B magazine unit of Reed Elsevier. The firm has been on the block for the better part of a year, with a dozen bidders expressing interest in a first round that seemed full of momentum. Trade buyers as well as private equity appeared, with Bain Capital, TPG, Candover, Cinven, Permira, Advent International and Providence all tied to the auction. Trade giant McGraw Hill appeared the strongest of the trade parties. By July, as the debt markets proved stubborn in their willingness to lend, Reed put financing on a plate to interested parties - and when the bank talks, led by UBS, failed to cover the sum needed, Reed even offered a "top-up loan" to the staple debt. This proved fruitless, since a second round in August failed to yield a result. What it did produce, however, was waning momentum: initially the asset was on the block for up to £1.5bn; now figures of as low as £700m are being thrown around.

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• Topics
• Exits
• UK / Ireland