The latest Unquote-LDC Regional Mid-Market Barometer, which tracks dealflow and sentiment in the UK private equity mid-market, revealed a further upturn in both deal flow and deal value in 2010 compared to the previous year and budding confidence for the mid-market’s 2011 prospects.
After a very difficult 2009, last year was the year of the recovery. With strengthening economic indicators and improving debt availability, confidence returned to the market, resulting in a much-needed bounce in deal completions in both size brackets and throughout all regions.
LDC remained the most active mid-market player in 2010, completing 12 deals, and with more reasonable pricing levels other houses were also more visible and re-entered the market.
Barnstorming start to 2010
Transaction volumes in the £5-150m range soared to 92 deals in the first half of the year, the highest level since H1 2008, while overall value followed suit with a high £2.1bn total. The momentum, however, could not be maintained throughout the second half of the year, which saw a more modest 69 deals being completed for a total value of just £970m.
It was once again activity in the lower deal bracket that provided the bulk of dealflow throughout the year. Having already weathered the downturn somewhat better in 2009, volume levels in the £5-50m bracket remained robust in 2010 recording 66 transactions worth approximately £1bn in the first half of the year, while dropping to 57 transactions worth £882m in H2 2010.
Certain regions fared comparatively better than others. While London once again took the lion’s share of recorded deal activity, fellow regions saw the biggest increases in volume compared to the previous year, eg volume in the South surged by 30% to 30 deals.
Consumer/Services dealflow soared
With the overall economic picture gradually improving, most sectors recorded a rise in activity levels. Notably, deal volumes in the consumer and services sectors soared in 2010 as investors grew more confident about business prospects in cyclical sectors.
Transactions in the consumer sector jumped 50% to 41 deals, while investments in the services sector more than doubled to 43. In contrast, activity in the media sector dropped to a historical low, recording only three transactions worth £153m.
LDC holds on to top spot
For private equity houses themselves, the year brought differing fortunes. LDC, for its part, remained the most active investor in the UK mid-market, completing 12 deals during 2010, but unlike the previous year other investors also returned to the market.
Most industry participants remain upbeat for the prospects going forward and there is a strong consensus that deal activity will see a further increase in 2011 while many also expect a healthy exit market.
Regional Outlook
Norther region bounces back
In terms of volume and value the north bounced back in 2010. In the £50-£150 million range there were eight transactions, three up from 2009, with average deal value up to £92 million (from £76 millionin 2009). In the smaller deal bracket (£5-£50m) there were 29 transactions, up 21% year-on-year, with deal value up 15% to £463 million and average deal value holding steady at £16 million.
Although activity is still some way off levels seen during the market’s heyday, it is heading in the right direction as Carl Wormald, Director of LDC’s Manchester office, explains. “We were pleased to see a decent bounceback in 2010, although volumes remained subdued compared to the long-run average. Activity did increase in 2010 as a result of some good companies coming back to market, and the return of buyers, particularly private equity.”
London remains at the forefront
London was once again at the forefront of private equity activity, accounting for almost 40% of all deals recorded in 2010. Says Daniel Sasaki, Managing Director of LDC London: “2010 was a good year with a slow but steady uptick in transactions, which were of high quality.”
It was the larger deal bracket that saw the biggest turnaround, with 13 transactions recorded, worth £1.1 billion, compared to only one deal in 2009. Average deal size at £83.4 million easily trumped the 2009 figure of £64 million. In the smaller deal range, volume of deals was down two, to 51, but the total value was up 10% to £711 million with an average deal size of £14 million.
With this resurgence in deal flow has also come greater competition, but despite this Sasaki is confident 2011 will prove to be a good buyer’s market, as even with increasing competition there are plenty of investment opportunities to choose from.
Strong returns offset lower dealflow in the Midlands
Although the Midlands is not known for its activity in the larger deal range, 2010 saw a welcome rebound in the volume and value figures. In larger deals, the region recorded four transactions, the same amount as in 2008 and a significant improvement on the one deal seen in 2009. Total value was £389 million, more than treble the 2009 figure. In the lower deal range deals ticked up from 11 to 13 in 2010 with value up 18% to £250 million.
Though by historical standards deal flow is still low, this has been offset by the region’s steady flow of strong returns, which look set to continue as more reasonable pricing levels return.“Valuation expectations are still normalising on the back of the peak from 2007/08, although vendors have become more realistic about pricing over the past 18 months,” notes Martin Draper, Managing Director of LDC’s Midlands operations.
Southern region witnesses remarkable turnaround
In both deal size brackets there was a remarkable turnaround, with deal activity soaring to 13 transactions (£1.05bn) in the larger segment and a similar strong performance in the smaller bracket too, with deals up 30% to 30 (£505 million) – the highest increase of all the UK regions.
Summing up the statistics Darryl Eales, Chief Executive of LDC, commented: “The market for private equity transactions has been testing over the past 18 months but it is heartening to see that the whole community is once again reviewing opportunities that will help to re-energise the PE market, and by default, support SME activity in the UK. Of particular importance to LDC are the reassuring figures that the regions are now producing which is further evidence of the business strength we have in the UK.”