Private progress
If we base views on the activity levels of private equity firms in March and April 2010, you could be forgiven for thinking you had joined Dr Who in the Tardis and gone back in time two or three years. Deals such as the IBO of HobbyCraft by Bridgepoint, completed in less than three months and through a strict auction process, the acquisition of Card Factory by Charterhouse hot on the heels of their similarly sized purchase of Deb Group (the Swarfega business), Advent’s purchase of DFS - and I could go on - show me that the larger private equity funds are back in acquisition mode.
And there has been a corresponding rise in the mid and smaller equity cheque size market with H.I.G backing the management buyout of Synseal Extrusions (which Catalyst originated), Phoenix investing in Andrew Page, the privately owned motor parts factor, Hg Capital buying JLA Laundry Equipment and buy-and-build houses such as Sovereign, Lyceum and Synova all completing smaller platform deals to name only a few.
So the question is - what has changed from the start of the year?
The simple truth is that the fundamental elements to do a deal - a willing seller and a willing buyer - are back in evidence. Owners of businesses who did not make it to the exit before the door slammed shut in early 2008 have now been sitting on their hands for more than two years and probably see no reason why the environment is going to change significantly for the better over the next 36 months (in fact, capital gains tax increases look ever more likely). Private equity houses exist to make investments and create returns for their own investors. Their own place in the world, and the remuneration they should receive, is starting to be called into question because they have now been sitting on the funds raised pre-2008 for too long.
Most interestingly, (and usefully, for shareholders and management teams) these funds are doing deals at decent multiples (they would rather pay a higher price for a good business than buy a poor business cheaply), at lower transaction sizes and without the debt element being fundamental at the point of completion. This last point is particularly interesting and is driven by two factors. Firstly, and somewhat perversely, this dynamic is occurring because (as we have seen in our own deal completions) the debt market has loosened up quite considerably in the last four months. Private equity funds have, therefore, got the confidence they will secure a good banking package in a reasonable timeframe post-deal, unlike the situation during the majority of 2009 when debt could just not be found, no matter how strong the business plan.
Secondly, whilst the debt market has loosened, bringing the debt alongside so that it is available at completion is still one of the most problematic parts of delivering a private equity deal. Therefore, private equity houses that are awash with money can (and in some cases, want to) part with all of the money required at completion.
So whilst knowing what has changed is helpful, the killer question for business owners is: how long will this last?
Keith Pickering is a partner at Catalyst Corporate Finance
