Firms will not pay too much despite pressure on funds

John Bakie
27 July 2010

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Half of private equity professionals say they are under pressure to deploy funds, but say they will not acquire assets at multiples higher than the industry average, according to Grant Thornton.

Research from the firm's Private Equity Barometer, conducted by IE Consulting, shows that private equity firms are planning to invest billions of pounds in the UK over the next 12 months.

Although 49% of respondents agree that they are under pressure to deploy funds, only 27% concede that they are prepared to acquire assets at multiples higher than their industry average., which seems to be reflected in the modest rise of EBITDA multiples that respondents were prepared to pay for the three most coveted sectors: business support services (6.4 compared to 6.2 in Q1); healthcare (8.1 compared to 7.9 in Q1); consumer products and services (6.4 compared to 6.2 in Q1).

The quarterly survey of more than 100 private equity executives in the UK found that more than 42% expect to invest more than £50 million in the UK in the next 12 months, with nearly half that figure (20% of the total) expecting to invest more than £100 million. Almost 50% of respondents expect to invest between £11 million and £50 million, while the remaining 8% plan to invest less than £10m or not at all.

"In the face of economic uncertainty, our private equity respondents alone are planning to invest more than £5 billion in the UK in the space of a year. More than half of our respondents see a sustainable recovery in dealflow," comments Mo Merali, Head of Private Equity at Grant Thornton UK LLP. 75% of respondents expect to see an increase in the volume of new investments over the coming 12 months, compared to 80% who expected an increase in Q1 2010. At least 15% expect an increase by half or more.

"Financial sponsors have paid steeper prices for recent high-profile transactions as stiff competition from trade bidders kept pushing average prices up. Yet offer prices will continue to be curbed as financial sponsors only expect to be able to secure modest average debt multiples of 3.3 in the next 12 months," Merali added.

Interestingly, 43% of private equity respondents agree that "incentives have never been greater for executives to leave their firms and set up a new fund", although it is unlikely that spin out groups will be able to raise a new fund and invest much capital within a 12 month time frame.

Morali explains the findings of the latest research here.