Macroeconomic uncertainty helps stalls dealflow
The largest deal sector (£50-£150 million) suffered most, with London faring worst, while the North was the most resilient, and the South suffering the steepest fall in the smaller deal size (£5-£50 million). There were a number of factors behind the dramatic fall of around 75% in both volume (just 10 deals) and value in deals in the £50-£150 million range. Lack of debt was one reason, but also macroeconomic uncertainty, which made forecasting businesses future trading mere guesswork was a real barrier.
In contrast, activity in the lower deal bracket weathered the storm somewhat better, recording an overall drop of only 43% to 107 deals. The second half of the year also showed a pick up, with the number of deals up from 47 in 1H2009 to 70 in 2H2009. Overall, London recorded the smallest drop in volume in the £5-50m range, contracting by a fifth, while dealflow in the Southern region fell by a more dramatic 60%.
Financial sector defies wider market deal slump
Though the overall picture was bleak across all regions and deal ranges, in terms of sector, there were some better performances. The financial sector was the star, recording a market-defying 20% increase to 11 transactions in 2009. This is unsurprising: as a counter-cyclical asset class, private equity was always likely to go bargain hunting in a sector heavily affected by the downturn. Additionally, healthcare investments recorded a comparatively modest 22% decline to 17 deals, as investors favoured stable cashflow resilient businesses in the downturn.
Still the greatest number of deals was in the industrials sector, which has historically been the case, recording 28 transactions worth £550 million, some 24% and 22% respectively of the overall totals. Joint second in terms of volume ( 12 deals each) came the services and technology sector, though in terms of value the only recorded £389 million and £245 million respectively.
Northern regions sees 50% fall in deals but improving pipeline
It was undoubtedly a difficult year in the Northern region, which encompasses both Northern England and Scotland. Traditionally it has been the second largest market, a position it maintained in 2009, but dealflow halved compared to the previous year in both the smaller and larger deal size brackets. There were just 24 transactions with a total value of £435 million in the smaller deal sector, while there were just four large deals with a value of just £300 million, one of which was LDC’s £75 million buyout of Subocean Group.
Contrastingly, there was a shift towards buyouts in the smaller deal arena, where LDC completed the £32.5 million buyout of Quantum Specials Ltd, while in the larger deal sector there was a shift away from buyouts, as financing still remained scarce. Looking forward though, pipelines have improved and John Swarbick, senior director at LDC’s Leeds office believed that by the end of 2009 there was ‘more clarity on what debt was on offer and increased stability in the economy giving rise to increased confidence.”
London suffers but can look forward to some vintage years
London has historically been the heart of the UK private equity industry, though it has seen its dominance curtailed somewhat in recent years. It is therefore a testament to the market’s underlying strength that it has pulled away at the top of the dealflow rankings – in the mid-market at least – though like the other regions it did suffer. While the larger deal bracket saw a slump to just two transactions completed, worth only £184 million, compared to £1.7 billion in 2008, the smaller deal bracket still recorded a respectable 55 deals, though there was a flight to quality and more equity was required to complete transactions according to LDC London Managing Director Peter Brooks.
Going forward Brooks believes that dealflow will not increase dramatically in the short term but that “the pressure of money might spur activity” with overall dealflow eventually doubling compared to last year. He also thinks the next two years will be “a good vintage”, pointing out the strong opportunities in the outsourcing and financial services sectors
Need for operational improvements could drive deals in the Midlands
The UK’s industrial heartland has suffered a difficult period in the past few years as the UK has been moving towards a more service-based economy. The region has never been known for activity in the larger deal range and last year there was only one – the £115 million buyout of 1st The Exchange by LDC. In the smaller deal bracket, transaction volume fell by 50% to just 10 deals in 2009 with a 66% fall in value to just £166 million – 10% of the overall market.
However, Martin Draper, Managing Director of LDC’s Birmingham office, believes that the region’s re-invention of its core strengths over the past 10 years have helped it weather the economic storms and emerge stronger. Going forward, he thinks that the drive for operational improvements within businesses could be a major source of deals in 2010 as well as a lessening of uncertainty driving confidence and an improvement in the debt situation.
Southern region’s services sector could do well in 2010
In both the larger and smaller deal bracket, the South suffered: in the former there were only three deals, with a value of £297 million, 62% down on 2008, while in the latter deal activity declined by 60% to just 19 transactions, with a total value of £260 million, down 72% compared to the previous year.