UK Watch shows steady decline in buyout activity despite favourable conditions

20 May 2002

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The latest Royal Bank Private Equity sponsored UK Watch highlights the continuing slump in both the volume and value of buyouts over EUR 10m. In the 12 months to April 2002, 114 buyouts were recorded with an total value of EUR 22.71bn, compared to 164 transactions with an total value of EUR 33bn in the 12 months to April 2001. However the persistence of a slow investment climate is occurring against the backdrop of downward pressure on p/e multiples for EUR 10m+ buyouts, which now stands at 8.64. Although this pressure is being maintained by lower levels of interest in investing â€“ whilst many portfolio companies require attention â€“ recent fundraising activity, and the final closing of a number of larger funds, points to a return to an investment focus over the course of the next year. Given the continued allure of the mega-buyout, eyes may also be focused on upcoming flotations to establish the overall health of the market.

Further indication that favourable investment conditions are returning to the market is provided by the gearing graphs. The average proportion of equity in EUR 10m+ deals without mezzanine has dropped to 40% - just 0.5% higher than the record low of 39.5% (in the past six years), which was recorded in December 1999. This figure, down from 43% a year ago and over 44% six months ago, hints that banks are regaining their nerve. However, the story is not quite the same for buyouts including mezzanine, where the average percentage of a transaction value provided as debt or mezzanine has dropped from 68.1% a year ago, to 68.0% six months ago and down to 65.2% now.

Despite the low levels of activity in the buyout market over the past six months, the longer-term resilience of private equity, as compared to the quoted market, has been highlighted by the recent BVCA reports on investment activity and performance (see page 12).