Private equity mid-market – Autumn review
Summer holidays are already feeling like a distant memory, with suntans fading and people back at their desks with a renewed focus for the 4th quarter.
So, I thought it would be a good time to take stock and reflect on what’s been happening in the private equity mid-market this year, drawing on some of the data we’ve collected on transaction activity in 2015 to date.
The trading environment
Thankfully, the economy seems to be steadfastly plodding on an upward trajectory, but there are still a couple of factors that have impacted the market this year:
1) The political landscape:
The election in May created a huge amount of uncertainty and nervousness. Opinion poll predictions of a hung parliament and potential awkward coalitions seemed to have spooked the market as a whole into holding off on transactions, and management teams have stalled on potential sales.
When a Conservative majority was returned, confidence bounced back and the period of limbo ended. Realistically however, the market is still playing catch up.
2) Historical economic legacy:
Private equity investment decisions are largely based on a thorough assessment of financial performance and growth over the 3 – 5 year period pre-investment. However, 3 – 5 years ago, the UK was still feeling the effects of the credit crunch. Although officially out of recession, recovery was slow and businesses were still fighting to survive in an extremely challenging trading environment.
3) Scarcity of good assets:
Those that can demonstrate strong trading figures over this period, then, are in short supply. This means that there have tended to be a lack of options for funds searching for viable investments. And of course, when good assets are in short supply, they can demand higher prices. Some funds I’ve been talking to this year are firmly of the opinion that ‘toppy’ or optimistic valuations have been put forward as a result.
Conversely, businesses that don’t tick all the boxes are just not seeing investment.
Against this background, we’ve tracked an overall fall in transactions compared with this time last year. MBOs have fallen from 73 transactions to just 39 in the same period, a 47% drop. SBOs and trade exits also fall short of last year’s levels, but less drastically so at 30% and 25% respectively.
That said, growth capital investments have risen year on year from 19 to 27 – up over 42%, suggesting that at the lower end of the market there is an increasing risk – reward appetite.
Overall, the number of private equity mid-market transactions to the end of August has fallen from 199 to 164, a reduction of 18%
Despite the apparent shortfall, it’s my belief that transactions will gather pace during the rest of 2015, as the underlying indicators point to favourable conditions and a strong appetite for investment.
- Debt is readily available, with banks looking to increase their lending.
- After holding onto assets and riding the recession, private equity funds have businesses that need to be sold.
- There is an increase in growth capital investment, exposing a new generation of businesses to institutional investment
- Fund managers have successfully raised capital this year, and are actively seeking ‘angles’ that will allow them to deploy that capital with many looking for ‘platform’ deals.
Looking forward to the end of 2015 and the beginning of 2016, I believe the conditions are right for private equity funds to finally cast off the legacy of the recession and start to make investments for the future.
Businesses looking to secure investment need to focus on creating a credible story to present to investors.
The best place to start is to concentrate on getting the right management team in place, with the right mindset for creating value and growing equity.
We’ve now published The Overview, a deeper delve into the detail of 2015’s activity with analysis of regional trends, deal flow, sector breakdowns and hold periods. It’s available for download here
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