Second quarter 2008: surprisingly buoyant results

14 July 2008

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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 all is perhaps well and in some respects surprisingly buoyant.

The year started with a very confusing picture caused by two diametrically opposite effects: the slow down in the economy, leading to nervousness and therefore less deal-making, at exactly the same time as fiscal changes in capital gains tax rates and non-domicile rules were creating a huge incentive for owners to sell their businesses. So, writing three months ago, we were very unsure how things were going to turn out as the year progressed.

Well, the statistics, and indeed the experience for us in the first half, make us heave a big sigh of relief. All seems to be well - at least for the moment and at least in some, or maybe most, parts of the market. Let's have a look at the facts as illustrated by the preliminary Q2 08 statistics:

- First, larger buyouts (>EUR150m), the part of the market you might have thought would have been completely destroyed by the credit crunch. Yet, even here all is not as much doom and gloom as you would have expected. Yes, total deal values are down compared to 2007 - but that was a mega year. Compared to earlier years, 2008 is doing fine by value at EUR13bn in the year to date - similar to 2006 and more than any of 2002 to 2005 at the same point in the year. The pattern is the same in terms of numbers of deals (24 for the year to date), but the difference compared to 2007 is noticeably less marked. So it looks like we have lost just a few of the really mega-mega buy-outs, which is a problem for the small community of deal-makers in that sector - one such was heard to comment, "what's the point of coming in to work when there is nothing to do" - but not necessarily for the rest of the private equity community.

- So to smaller buyouts (

- The news for early-stage and expansion capital deals is also not nearly as bad as it was, for example, in the gloom-ridden days of 2003-2005. Numbers of deals at 133 are higher than in any of those years and aggregate values at EUR1.7bn are higher than both 2003 and 2005, though not up to 2004 levels.

So, maybe part of the reason for gloom - to the extent one finds it - is in reality that 2007 was a truly exceptional year, even by the standards of the ever-growing European private equity markets.

But despite the statistical evidence and a strong period for ourselves at Corbett Keeling, we cannot help but feel a little nervous about the future. It is certainly true that banks have, across the board, reined in the amount they will lend - albeit the impact is much more obvious for larger deals. And one mid-market equity house said to us recently that they have seen a marked down-turn in the number of prospective deals coming through their doors - but in the same breath they admitted to such a flurry of new investment completions that they are setting their sights on raising their next fund early!

The contradictory evidence does not stop there: while the EBITDA chart shows that enterprise value to EBITDA multiples for private equity backed deals done are ahead of the corresponding multiples for the FTSE All Share - which one might interpret as an indicator of buoyancy in the market - the outlook in the survey of future expectations is almost universally negative.

So the messages are mixed. One possible explanation is that a lot of transactions happened in the first five days of quarter two - and they did - before tax changes came into effect. We will have to wait till the third quarter to get a real view as to whether the sector has slowed down. Watch this space!

- Jim Keeling, joint chairman, Corbett Keeling; www.corbettkeeling.com.