Weekly round-up: two-track UK market emerges

Despite the flood of liquidity enjoyed in the UK credit markets, a split is emerging between the lower and upper UK mid-market. Contrary to expectations of a flurry of upper mid-market activity as credit markets improve, the lower mid-market has proved to be by far the busiest segment, taking the lion's share of deals. "The £100m-plus ticket segment is by far the most liquid and hottest end of the market where you can find the best terms and pricing. But, this end of the market is housing less activity compared with the lower mid-market. And the lack of deals at this end of the market is only creating more heat as competition steps up," says James Ranger, co-head of the acquisition finance mid-market team at Lloyds Bank. With the rise of unitranche leading to more aggressive pricing of senior debt, alternative lenders are being squeezed out of the market – a problem exacerbated by the return of high-yield bonds and mezzanine. A paradoxical two-track market emerges.

Spanish private equity is enjoying a renaissance. Once the sick man of Europe, the market is now attracting the attention of private equity behemoths from across the globe. And international LPs are returning, expressing interest in the multitude of local funds currently in fundraising mode. Nevertheless, regulatory limitations continue to restrict the national LP base with pension funds' allocations notoriously low. However, regulatory support is evident in the lending space, where legislation is currently being prepared to allow for direct lending. As the tremors of the financial crisis subside, the local market emerges stronger than ever.

The private equity industry in central and eastern Europe is becoming increasingly polarised, as Ukraine remains fixed in Moscow's orbit. But though tensions are increasingly eclipsing Russian investment opportunities, dealflow in the rest of the region is stellar; overall dealflow peaked in Q1 2014, reaching a high point in volume terms across a five-year sample and a 38% increase on the previous quarter, according to unquote" data. "As far as Ukraine and Russia are concerned, the impact of the crisis has been clear; deals are on hold and people are very cautious. Outside of those countries, it isn't having much impact at all," says Graham Conlon, partner and co-head of international private equity at CMS Cameron McKenna. And this bifurcation is expected to continue, with a number of global giants reportedly circling Slovenia's Telekom Slovenia, a number of regional players honing in on healthcare opportunities in Poland, and Turkey doubling its share of CEE deaflow in volume terms.

Activity in the north west of the UK is booming on the back of strong local businesses and institutional investors' appetite for the assets. And when it comes to IPOs, the region is blazing a trail. Home to several of the most successful companies to list recently, including Crewe-based Bargain Booze and Iver-based DX Group, the north west is setting quite the example. However, it's not all good news as heightened deaflow in both acquisitions and exits is pushing up pricing. Nevertheless, the future's bright, with an increasing supply of alternative lenders paving the way for upcoming deals. Says Alexei Callender, director of corporate finance at Zeus Capital: "The north west is an entrepreneurial location and it is cheaper to operate out of here – there is also a wealth of talented people coming out of Manchester University. In addition, the region benefits from a well-established advisory community and a strong private equity and banking presence seeking out new investment opportunities. The north west is a fertile place to establish a business."

Deal value in Benelux is on the up, with several recent upper-mid and large-cap transactions recorded in recent months. But behind those deals are a number of foreign players, acquiring and divesting Benelux's biggest assets. French players in particular are showing more interest in the region, pointing to an emerging synergy between regional neighbours. Indeed, mid-market investor Argos Soditic opened its first Benelux office in Brussels last year, highlighting scope for pan-regional transactions.

That's all from me this week but if you have any comments on this week's analysis, please send your thoughts to amy.king@incisivemedia.com.

You can continue to follow me and the rest of the unquote" team via @unquotenews for all the latest private equity and venture capital updates, and of course on unquote.com.

Amy King
News Editor, unquote"

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