2008: slow start, with a grinding of gears

In its regular quarterly commentary on private equity activity in the UK, Corbett Keeling gives a practitioner's view of trends in the number, value and financing structures of deals - and concludes that the going is getting tough.

This time last quarter, we were reporting on an exceptional 2007 year, but there was already widespread expectation of a much tougher start to 2008. That expectation has been borne out in spades. The drop in activity compared both with last year as a whole and, allowing for seasonality, with the first quarter of 2007 has been startling.

The most worrying feature of this for us deal-makers is that the slowdown has arisen despite a marked determination by many sellers to get deals done before the close of the 2007/08 tax year. So we have experienced something new that none of us at Corbett Keeling can recall before: a grinding of gears as the economic slowdown has done its best to bring deal-making to a complete halt while fiscal incentives have had a diametrically opposite effect, giving an unprecedented encouragement to get deals across the finishing line.

Let's take a look at the preliminary Q1 08 statistics:

- Larger buyouts (>EUR150m) for the first quarter of 2008 are at less than half the volume and value of the same period last year. More frighteningly for those readers who earn their crust from larger deal-making, volumes are less than 1/10th those for all of 2007 and values less than 1/20th. But maybe that is the worst of it and, if you are involved in smaller deals, don't panic quite so much - read on.

- Smaller buyouts (

- The relatively stable picture for smaller buyouts does not continue into early-stage and expansion capital deals which have been hit almost as hard as larger buyouts with deal values at around 1/10th of that in the comparable 2007 period and volumes also down (though not so dramatically). So smaller buyouts appear for the moment to be an oasis of hope.

One might be forgiven for thinking the respondents to the survey of future expectations saw the statistics in advance. Alternatively, they are a remarkably prescient bunch or, perhaps, the future is just more obvious than usual. Larger buyouts together with gearing and entry multiples are widely expected to decrease. Smaller buyouts and numbers of early-stage/expansion deals are the only categories where there could be said to be any degree of optimism.

When asked whether we are headed towards full-scale recession, the majority of respondents to the survey sat on the fence but, by the time you read this, you may have already started to feel the tide of post 5 April dealflow and so be sensing which side of the 'grinding gears' is winning: was it just tax driven considerations that kept things going for smaller deals in the first quarter of 2008 or was the economic impact of the credit crunch really not hitting that part of the market and so only producing "recession" for larger deals? Either way, though, you will know that every downturn throws up opportunities.

And one thing is for certain: as we write, days before the 5 April tax deadline, there are already some rather tired lawyers and others trying to finish off multiple deals in the last few days of the tax year. One reported to us that he had five separate completions neatly timetabled for each of the last five business days. Our retort: chance is a fine thing and he will be lucky not to find that, as reality dawns, he has five completing all at the 11th hour of the last day - there's a really tired lawyer!

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