Second quarter 2009: is the deal drought ending?

In its regular quarterly commentary on UK private equity investment activity, Corbett Keeling gives a practitioner's view of trends in the number, value and financing of deals ... and concludes that the drought may be ending.

At the end of quarter three 2008, the deal-making world fell off a cliff. Transaction volumes ground to a halt and a drought commenced. Deal structures and valuations that were commonplace last spring and summer would be unimaginable today. There are not yet any significant signs of let-up - so it seems we are in for a full year of drought, almost certainly up to the end of the third quarter of 2009 at least - but there are some faint rays of hope. Before we get over-optimistic, though, let's look at what the facts say about historic volumes and values of management buyouts. We will examine these, as usual, divided between larger deals of more than EUR150m enterprise value, then less than EUR150m and finally, early-stage and expansion capital deals.

The market for larger buyouts (of EUR150m or above) has been weak, though not quite as difficult as in the preceding two quarters. The initial reaction in larger buyout circles to last autumn's events was to shut the door completely on all new deal activity, and the door remained firmly shut for six months, with no larger buyouts completed at all. However, the door is now perhaps being pushed open - albeit only a little. In the second quarter of 2009, a couple of larger buyouts were finally done. These were not huge deal numbers, nor were they in the mega-value bracket of previous years, with the two deals comprising only EUR900m enterprise value in aggregate, but at least some funders have decided it is once again worth putting their money to work. A ray of light? Maybe.

The door never shut so completely on smaller buyouts (below EUR150m): 10 were recorded in the final quarter of 2008, 14 in the following quarter, and another 14, with an aggregate value of EUR250m, in the quarter just finished. One funder, LDC, has even reported a mini-boom in deal volumes - again a ray of light, or, with deal numbers in the first six months of this year at one third of their level in the same period last year and values even lower, is this false hope?

The picture for early-stage and expansion capital is slightly better still with deal numbers for the first six months of 2009 at around 60% of their level in the same period of 2008. The relative buoyancy of this part of the market is perhaps explained by the fact that it includes restructurings - of which there have of course been plenty in recent months. So, perhaps it is surprising there has not been more early-stage/expansion capital activity; but perhaps that's because debt providers have been unwilling to bail out each others' deals, so equity funders are increasingly left to carry the day alone; a point further illustrated by the chart showing the ratio of equity only funded buyouts to all buyouts. This part of the market does though seem to provide some rays of hope to light what has otherwise been a difficult landscape for those wanting to get businesses funded and deals done.

Turning from historic facts to the future, let's look at the survey of future expectations - what do practitioners in the market-place think will happen in the coming months?

This is maybe the most remarkable feature of the quarter: there has been a significant shift in optimism about buyout volumes, with three quarters of those surveyed thinking smaller buyout numbers are on the up and twice as many thinking larger buyouts will increase as predicting a decrease. At the same time values at which deals are done are expected to fall.

So this is good news, for buyers certainly - but also for sellers, as they should, finally, be able to get their deals done. That matches our view, based on what we see at the deal-making coal-face. So, although the summer may be as quiet as ever, we believe we can look forward to an autumn with an increasing number of completed deals.

Jim Keeling, joint chairman

Corbett Keeling

www.corbettkeeling.com.

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