Exits: Light at the end of the tunnel?

Viktor Lundvall
28 January 2011

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As 2010 saw buyout activity resurge from an exceptionally quiet 2009, the PE-industry was hoping the exit market would also come alive. Last year however proved to be far less favourable for the exit market than many had hoped for. Is this about to change in 2011? Viktor Lundvall reports.

Expectations of an improved exit market were high last year following the worst recession in recent memory. Despite some European economies experiencing difficulties, 2010 will go down as a year of recovery for most. With credit markets more or less back in play and rising confidence levels, many expected improving conditions to result in some long-awaited exits.

With hindsight however, it is clear that the number of exits by private equity funds in 2010 was disappointing considering the exit backlog following the crisis years. Although up on 2009, exits recorded by unquote" across Europe were down on 2008 figures and less than half of those recorded in 2007. The importance of completing exits was further highlighted by the fact that a large number of GPs are about to start, or indeed are already, fundraising. A tough fundraising environment raises the need for a strong track record, and a few recent successful exits in the bag can go a long way.

Even if the last twelve months failed to generate a flurry of exits, certain sectors did provide success stories. The healthcare sector for example, was one of the more reliable sources in 2010. Notable disposals include EQT's sale of Aleris, Montagu's exit of Sebia and the flotation of BC Partners' Médica. Taus Wolfsberg, head of private equity at KPMG Sweden, echoes this sentiment when speaking about the Nordic market. "Apart from certain sectors, such as healthcare, we do not feel that 2010 has been a particularly strong year for exits."

Unsurprisingly the price that an asset will fetch increases with its quality. It is these high quality assets that have made up the bulk of exits in 2010. Christopher Fägerskiöld, head of M&A at KPMG Sweden, believes that assets of lesser quality will become easier to sell in 2011. Multiples for these transactions will be lower however, owing to banks being less generous than in the past. "We will see an increased polarity between the price of quality assets and assets more affected by cyclical fluctuations or that require more capital expenditure."

As a result, Fägerskiöld believes that the number of exits is likely to increase in 2011. He also adds that industries particularly affected by the downturn will grow strongly in 2012, with 2010 having been a year of recovery and 2011 a stabilisation year. "Sellers will be eager to off-load companies this year as it will enable them to point to strong prospects for the company in the coming year, something that is important for a successful exit."

As the New Year gets under way, an increase in deal activity and exits is likely to be seen. According to Wolfsberg, preparations for a number of structured sales processes are already under way, which means exits in 2011, particularly from the second quarter onwards, will be increasingly common.