Corporate bees-iness

May has marked the busiest month for the UK buyout market this year. Between 11-18 May, unquote" clocked up three buyouts (with another just a week earlier and yet another a week later). While this number would have seemed totally insignificant a year ago, today it is impressive: just 14 UK buyout deals closed in the first three months of this year worth a total of EUR252m, according to unquote" data.

On the face of it, this is good news for corporate financiers, whose lifeblood work was selling assets. "A couple of years ago, the majority of our business came from the sell-side of private equity, when a retainer would be about £50,000. Today, there is little if any activity on the sell-side. I'd look very carefully at someone looking to sell at the moment. There has to be a good reason, otherwise I would advise them to hang on - as much as it pains me," says Peter Hemington, partner at corporate advisory firm BDO Stoy Hayward.

And so all eyes are on buying businesses. An economic downturn is a fantastic opportunity to consolidate sectors by purchasing complementary and competitive businesses at reduced valuations.

Paul Lupton, head of corporate finance advisory at Deloitte in the North West, is part of the action: "I am having a lot of dialogue with companies that want to raise equity or debt to make their businesses stronger, and then utilise this strength to consolidate their markets. When companies join together, there is often duplication in terms of overheads and costs. Significant value can be created from items within the companies' control."

Lupton goes on to say that there is quite a lot of private equity appetite to take minority stakes in "good companies that have an opportunity to consolidate their market places". These transactions are lower risk than the traditional MBO, as value is not passing to exiting shareholders, and the private equity house invests alongside incumbent management.

Indeed, in the absence of debt, many private equity professionals are looking to take minority stakes in listed companies, since little to no debt is required. But this is not without its problems. "Private equity firms would have to buy regular equity alongside regular shareholders. Most of them really dislike this. This is not how private equity people make money," affirms Hemington.

Not only this, but many large institutions are also against the private equity model of incentivising management. When it comes to PIPEs, LPs might not be so keen on the idea, as an investment in a public company is one they could make themselves.

Still, there has been some recent PIPE activity in the UK. Last month, Octopus Ventures invested £2m in listed pharmaceutical company e-Therapeutics plc for a 5.1% stake, while BlueGem agreed to invest £15m into AIM-listed stockbroking company Panmure Gordon, in exchange for a 40% stake in the business. It has even been reported that rival private equity firms are challenging BlueGem for its stake in Panmure.

Meanwhile, on the higher end of the deal spectrum, private equity giant Warburg Pincus invested £64m in listed food retailer Premier Foods for a 10.3% stake in March, which was part of a £404m capital raising for the company. Currently Pamplona Capital is looking to acquire a 29.9% stake in Lloyds' insurance business Chaucer, whose market cap rose to £226m on the back of the approach.

The dawn of a new day

While there are drawbacks in every investment area, there still seems to be talk of movement. And when there is talk, there is action. Or at least that is what they say.

There is a general feeling among the industry that things in the market will begin to pick up in September after hitting rock bottom in Q1 of this year, meaning that companies can actually begin thinking about M&A deals again.

"I'm a natural optimist. A lot of the work we do is on a contingency basis - there are always issues and we have to find a way around them. Having a positive perspective helps find these solutions. But we are seeing some banks have more of an appetite to lend. This gives me a little comfort in that things are not going to get worse," predicts Lupton.

Hemington too feels that though banks are careful of their commitments, a number of big banks are now open for business. He suggests that some of these banks (for instance RBS) are keen to focus lending on those private equity players that have a good track record with their teams. This means that although banks are taking a more conservative approach, they are slowly lending again, which could mean the start of more stable deal flow.

Gary Edwards, head of asset-based lending at Investec Private Bank, feels that a large part of markets' improvement is based on behavioural economics: "Q3 and Q4 this year will feel and look better because the comparative periods in 2008 were just horrible. This will help bring things up; comparatives and trends will not show the same drastic declines. The trend will be our friend again."

Busy fools?

Though corporate financiers seem to be occupied, there is a buzz among industry professionals that the busy bees' ends may not be justified. Back during the peak of the market between 2005-2007, corporate financiers thrived on their M&A strategy business. In other words, it has been said that some corporate finance houses have been promoting businesses they would never recommend in a peak market simply to win a retainer fee. Is this actually the case?

"I can imagine that only few boutique advisory firms are taking work on to get retainers," says Hemington. "Most firms can survive on what they made in the good times."

However Edwards has seen some "busy fools'" activity firsthand: "At the turn of the year, we saw some transactions that were clearly never going to happen - that no one in their right mind would ever go near, especially overleveraged refinancings and unrealistic valuations. This kind of thing can come back to haunt those corporate financiers, damaging the reputations of the few that behave this way."

He continues: "But private equity houses know and expect positive bias in some IMs. They are smart enough to do their own due diligence - especially now."

He insists, however, that despite the action of some, the corporate finance community in general is playing a huge part in re-aligning valuation and leverage expectations, which is beginning to increase the flow of transactions that will be completed.

Lupton feels that promoting a poor company can do substantial damage to the reputation, indicating that a corporate finance adviser would have to be fairly desperate to resort to this method of doing business. He would rather cost himself a fee than complete a bad deal: "The challenge today is to actually work a deal through to the end because people are very cautious now. We have to give clients the best advice. We could keep ourselves busy working on lower quality deals, but we won't get compensated for it. I would much rather spend time working up fewer high quality deals."

Despite the obstacles the private equity industry faces, it seems that if interest is any indication, corporate financiers could finally be on their way to closing deals again. Welcome back old friends.

P2Ps: Interest (not equal to) activity

In a recent study by BDO Stoy Hayward, it was found that over half of institutional shareholders surveyed would be receptive to a take-private. The question is whether private equity players are just as keen to get into the public sector.

BDO's Peter Hemington explains that though banks and private equity houses are hesitant to commit to any new deals, there has been a fair amount of interest in the public-to-private (P2P) sector because of market undervaluation. He gives the example of one consulting company, which has raised interest from private equity firms because of its low price, approximately 2x EBITDA, a far cry from 7x or 8x two years ago. But, he insists, "Each of these companies has issues to overcome and that is probably why they are so cheap."

However, Deloitte's Paul Lupton thinks that even though there is a lot of interest in P2Ps right now, there hasn't been a huge flurry of activity: "This is because share prices of smaller companies are relatively flat, opportunities to raise capital are limited and there is little liquidity to speak of in the market."

And, according to Michael Berry, CEO of new debt advisory company Versatus, there is still some reluctance on the part of institutional investors to sell to private equity funds when they are seeing generalised market writedowns as opposed to weakness in specific stocks.

This means that private equity firms can't purchase a listed company that cheaply now because vendor expectations have yet to come down.

"All markets are false markets at the moment and most investors feel they can just wait out the downturn until prices are up again," says Berry. He admits, however, that when it comes to small-cap and AIM-listed companies, owners might be more tempted to sell.

Price, however, isn't the only issue in taking a company private. Despite the banks' rhetoric that they are open for business, the fact is that finding a bank to sponsor a P2P is a difficult feat. "Banks get a bit freaked out about take privates because they require a bank to commit unconditionally relatively early - that goes against the grain of how they think," asserts Hemington. There is also less ability to do proper due diligence because it is expected that potential bidders form their opinions based on the public information that is accessible to everyone.

Whether the private equity industry can plough its way through all these challenges and successfully close a P2P deal remains to be seen.

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