UNITED KINGDOM – Although U.K. buyout market value reached a record high for the third successive year in 1998, preliminary figures from the Centre for Management Buyout Research (CMBOR) confirm a notable slowdown in the final quarter.
Dollars Up, Deals Down
CMBOR reports a total deal value of GBP13.4 billion ($21.88 billion) for 1998, $4.9 billion more than the preceding year. However, the value of deals completed in the fourth quarter of 1998, $3.6 billion, represented a 40% decrease from the average of the three preceding quarters. This decline is attributed primarily to decreased activity at the top end of the market during the final quarter, when the number of deals with a value of $81.63 million or more fell to 10 from 15 in the preceding quarter, and their total value more than halved to $2.12 billion from $4.41 billion. The larger- deal market is naturally more prone to quarterly fluctuation than that of transactions valued at less than GBP50 million, whose quarterly values have remained relatively stable during the past three years.
Big Deals Increase
Despite the final quarter decline, larger deals’ share of the overall market value last year increased to 70%, or $15.51 billion, from 64%, or $10.94 billion, in 1997, while the number of such transactions increased to 53 from 47 during the same period. Although the total value of smaller (less than GBP50 million) deals showed modest growth, increasing to $6.37 billion in 1998 from $6.1 billion the previous year, the 591 completions recorded in this market segment last year represented an 8% decline from 1997’s tally.
Externally generated deals – investor buyouts (IBOs) and management buy-ins (MBIs) – continued their decline during the final quarter of 1998, when 40 such transactions with a total value of $1.89 billion were recorded, compared with 50 deals totalling $3.51 billion in the preceding three months. Despite the fact that IBOs and MBIs declined steadily in value after the first quarter of 1998, they nevertheless continued to comprise the greater part of overall market value; with a 1998 combined value of almost $14.04 billion, externally generated deals accounted for 64% of the total market, an increase from $9.88 billion, or 58%, the previous year. The number of externally generated transactions also declined in 1998, falling to 203 from 245 in 1997; however, the average size of IBOs and MBIs throughout last year rose to $69.05 million, a 71% increase from the 1997 figure; this compares with an average 1998 transaction value of $ 17.96 million for MBOs.
Negative public market sentiment toward smaller-cap stocks enabled public-to-private deals to flourish last year. With a total value of $4.41 billion, the 32 public-to-private buyouts recorded in 1998 comprised 20% of total market value. According to Chris Ward, head of private equity at Deloitte & Touche Corporate Finance, the market slowdown would have become apparent much sooner had it not been for the money channeled into public-to private deals.
Last year saw 250 buyout and buy-in exits, 20 more than 1997. This total included only 13 flotations, compared with the 28 achieved in 1997, a decrease that is unsurprising in the context of a stock market that was largely unreceptive to small-cap stocks during the period under review. Secondary buyouts and buy-ins have emerged as an increasingly important exit route: private equity houses divested 40 companies through such transactions in 1998, three more than in the preceding year and double the number of secondary buyouts seen in 1994.
A more worrying trend is the increase in buyout and buy-in bankruptcies: 62 investments suffered this fate in 1998, representing a 32% increase from the previous year’s total and accounting for almost 25% of total exits. The casualty rate among MBIs was 32%, underlining the inherently riskier nature of these transactions than of buyouts involving incumbent management.
Buyouts and Buy-Ins Rise
Tom Lamb, Barclays Private Equity’s U.K. managing director commented, “The 32% increase in receiverships is a worrying sign of trouble ahead, but a rerun of the recession in the early ’90s, when receiverships were both a substantial source of new buyouts as well as the most likely exit for existing deals, is unlikely.”
U.K. buyout investors entered 1999 with unparalleled levels of funds at their disposal. It therefore seems unlikely that the recent slowdown at the top end of the market presages a serious or long-lasting market hiatus. Mr. Ward predicted that public-to-private deals would continue to boost activity levels for some time to come and that the IBO market will pick up again toward the middle of this year. Mr. Lamb sounded a more cautious note in the light of increased receivership levels, warning “private equity houses are likely to be spending more time on aftercare and less on new investments in 1999.”