News - Midlands
Something will go wrong and this will be the next cause cxe9lxe8bre of the financial markets. There will be blood on the boardroom carpet."
It takes a brave man to express such thoughts on the wave of secondary buyouts (SBOs) dominating the deals market. Private equity houses and corporate finance advisers are too deeply embroiled in the heady world of 20-player auction processes and multi-million pound tertiary buyouts to dare suggest that passing businesses from one venture capitalist (VC) to another will end in tears.
Tim Cofman, corporate finance director at broker WH Ireland in Birmingham, dared utter those treasonous words above.
"This reminds me of the glory days of the junk bond," he says. "Over-leveraged companies traded between a close group of people with a vested interest in maintaining prices, and an underlying economic justification based on returns before new money flooded the market."
The Centre for Management Buyout Research (CMBOR) says the deals market has become heavily reliant on SBOs as an exit route. No longer the exit of last resort, trading a business between two VCs has almost become the norm.
SBOs now account for 40 per cent of the market by value, compared with only 5 per cent in 2001. While these figures are slightly skewed by large deals such as the SBOs of Tussauds in May and Kwik-Fit in June, both valued at £3800m, all Midland players report increases in the number of secondaries crossing their desks.
Now that the private equity industry has got over its natural suspicions - "why should I want to buy what he's trying to offload?' - SBOs have taken off.
With investors calling for returns and a number of investments coming to the natural end of their three- to five-year lives, there is a well-publicised wealth of private equity funds swilling around the market and plenty of deals to pass around.
The banks are playing their part too, generating high debt multiples that leave VCs salivating. But commentators admit the market runs the risk of seeing over-leveraged deals.
"At some stage leverage will go over the top," says Phil Griesbach, director of Barclays Private Equity (BPE) and head of the Midlands office. "We've already heard of some highly priced deals falling over."
Ian Tetsill, head of Barclays Leveraged Finance in the Midlands, suggests caution. "We're very careful to make sure that the ones we back justify high debt multiples and are quality assets," he says. High debt multiples are driven by the bigger end of the market, with London lenders able to syndicate large chunks of debt across a range of funders.
"And we're seeing some big deal influences coming into the mid market," says Tetsill. "There's a lot of demand for debt, and some of those now buying it are not traditional clearing banks; they're funds, often insurance companies, that find leveraged loans an attractive asset class."
The logic of SBOs starts to fall down when you examine the ultimate investors in the various funds managed by VCs - you will see many of the same names.
"The ultimate institutional shareholders may be the same in some cases," says Andy Moore, partner at Clearwater Corporate Finance in Birmingham. "But there is the attraction of a still growing business if the same factors are still there and the shareholders get similar returns second time around."
But a business can only be passed on so many times before growth potential is exhausted or private equity is no longer the best option.
"How many times can these deals churn?" asks Stuart Crebo, corporate finance director at Ernst & Young Birmingham. "The process should end with the management taking full, private ownership - a virtual circle of wealth creation. But the world isn't so simple."
As competition increases between VCs eager to invest in quality businesses, the auction process has become a new market norm, taking businesses that may previously have remained in local hands onto the national stage. Midland private equity investors find themselves bidding against London peers and trade buyers, increasing competition and driving up prices.
Advisers love auctions, but some VCs, such as Griesbach at BPE, say they "waste everyone's time: you can spend time looking at a business along with 20 other VCs and the way to win is to bid highest".
For Ted Bell, investor for the Midlands at Close Brothers Private Equity, auctions throw up interesting opportunities - when they fall apart. "A number of businesses we've acquired have come to light after a failed process," he says.
"Only when a buyer gains exclusivity does vital information come to light, and when the dirty laundry is aired that buyer may back off. We come in clean, with the issues already on the table and the price expectations already managed."
The increase in SBOs and the prevalence of competitive auctions is pushing up prices and, in some cases, pushing out trade buyers. Make no mistake: trade buyers are back.
"Over the last 18 months there's been an increasing number of trade buyers approaching businesses on an unsolicited basis, though not at the heady level of the late 90s," says Andrew Durbin, corporate finance partner at Smith Cooper Corporate Finance in Derby.
"Private equity has come in with more money at auction. But in an auction process, if we've identified genuine strategic buyers for the business, that buyer will ultimately pay more than a private equity group," says Moore.
"We're seeing good prices fetched by overseas buyers."
As with any transaction, not all businesses will be suitable for an SBO, but the criteria are similar to those for an initial management buyout.
"If the incumbent VCs are happy with the track record, you will often get a management team that is au fait with the business and clear what managing a private equity-based business is about," says Martin Draper, regional director at LDC in Birmingham.
Most players expect the rise of the SBO to continue unchecked for some time to come. But while the old-fashioned primary buyout is in decline, most investors would like to see more of them. "The challenge is to get out there and find them," says Bell. "It's too easy for VC and corporate finance advisers to look at other portfolios, rather than finding new buyouts."
But the most worrying concern raised about the proliferation of SBOs is that Midland companies and investments are increasingly being sold to London investors.
"There've been many SBOs nationally, but not a huge amount within the Midlands of a local VC sending a deal to another," says Tetsill.
"It's a big pool down there in London. If VCs buy and sell locally it keeps work in town and the advisers and bankers are fed. If a business goes to auction it becomes a national game"
Taking back control
Alternative forms of secondary buyouts (SBOs), those funded solely through debt and management or through asset-based lending, create opportunities for companies that want to take back control or for younger members of management that want to claim their place at the helm.
"One of the reasons for the growth in SBOs is the different types of financing techniques available," says Simon Chapman, director at Baker Tilly in Birmingham. "It could be a business that's had a lot of the easy wins and the cost savings have already happened - it will grow moderately but not make great returns. New techniques can address that, such as integrated finance or blended finance products, which allow an SBO to happen for businesses that wouldn't make the capital gain that a venture capitalist (VC) is looking for."
Asset-based lender Enterprise Finance Europe (EFE) has backed transactions such as Birmingham-based Total Supply Solutions' buyout from venture capitalist LDC in March. "The ones we've financed have tended to be where management is looking to get control back when the VC is coming towards the end of its investment and a trade buyer or an initial public offering are not realistic options," says EFE director in the Midlands Ian Bath.
"It reinvigorates management because they are working for themselves rather than for VCs. We tend to find that these businesses have the discipline that is imposed by a VC, which means that there's financial reporting and the systems are very strong so we have the confidence to stretch the assets that bit further."
In Nottingham, plumbing and heating business Robert Prettie completed an SBO in August 2004 that represented the completion of a process that began with the exit of Barclays Ventures (BV) in 2003. BV invested in the business in 1999 and a management buyout in 2003 saw the founders take control, with the help of the Royal Bank of Scotland (RBS). Last year a management team advised by Smith Cooper Corporate Finance and led by Mark Murphy, who had been with the business for a number of years, took over.
"It was always going to be a natural step," says Murphy. "We hope to do the same in the future with the management coming through below us. The staff can see the benefits and see a management team they can talk to who are doing things a bit better. It wasn't that long ago that I was in these people's shoes. If there was another buyout in five years' time by management they've grown up with, they wouldn't see it as a problem."
And no longer being under VC ownership has its benefits. "There's less pressure because, although you owe money to the bank, you're doing everything for yourself," he says.
Another bite of the Midlands cherry
Gala
Nottingham-based bingo and casino group Gala has reached the heady heights of quarternary buyout status. In August Permira became the fourth private equity investor to take an equity stake in the group when it invested £3200m to join Candover and Cinven, backers of a £31.24bn buyout in Febraury 2003. This year's deal valued Gala at £31.89bn and the group just keeps on growing. In October the backers helped Gala acquire Coral Eurobet, the bookmaker and internet gaming operator.
Denby
Denby, the famous Derbyshire pottery group, was the subject of a £348m secondary buyout backed by Bank of Scotland Corporate in December 2004. Over the years the company has seen a management buyout (MBO) backed by 3i in 1990, a flotation in 1994 and a take-private by Phildrew Ventures in 1999.
Fosbel
In August 2005 Barclays Private Equity sold its investment in Fosbel, the Birmingham-based leader in ceramic technology, to American Capital Strategies, a US buyout and mezzanine firm. The £357m deal gave Barclays a return of over four times its original investment, a £320m MBO in July 2003. Fosbel's turnover has increased from £323m in 2002 to £348m in the current year.
Britax Childcare
US private equity house the Carlyle Group paid £3230m after an auction for Andover-based Britax Childcare, a division of Warwick safety seat manufacturer Britax International, four years after a high-profile take-private of the group by Royal Bank Private Equity for £3441m. The Birmingham office of Barclays Leveraged Finance helped fund the deal in September 2005.
The Works
In April 2005 Hermes Private Equity in London backed the secondary buyout of The Works, retailer of value books and artist materials based in Sutton Coldfield, in a £350m deal that provided an exit for Primary Capital, backer of a 2003 MBO. The Works, led by managing director Chris Maddox, has a turnover over £390m and around 230 stores.
Total Supply Solutions
The logistics and distribution services business whose core business - Component Logistics - is based in Birmingham, raised funding in March to effect an exit from LDC. The funding, a mix of asset-based lending, cash flow and trade finance facilities, was provided by Enterprise Finance Europe.
Dangerous Liaisons
Something will go wrong and this will be the next cause cxe9lxe8bre of the financial markets. There will be blood on the boardroom carpet."
It takes a brave man to express such thoughts on the wave of secondary buyouts (SBOs) dominating the deals market. Private equity houses and corporate finance advisers are too deeply embroiled in the heady world of 20-player auction processes and multi-million pound tertiary buyouts to dare suggest that passing businesses from one venture capitalist (VC) to another will end in tears.
Tim Cofman, corporate finance director at broker WH Ireland in Birmingham, dared utter those treasonous words above.
"This reminds me of the glory days of the junk bond," he says. "Over-leveraged companies traded between a close group of people with a vested interest in maintaining prices, and an underlying economic justification based on returns before new money flooded the market."
The Centre for Management Buyout Research (CMBOR) says the deals market has become heavily reliant on SBOs as an exit route. No longer the exit of last resort, trading a business between two VCs has almost become the norm.
SBOs now account for 40 per cent of the market by value, compared with only 5 per cent in 2001. While these figures are slightly skewed by large deals such as the SBOs of Tussauds in May and Kwik-Fit in June, both valued at £3800m, all Midland players report increases in the number of secondaries crossing their desks.
Now that the private equity industry has got over its natural suspicions - "why should I want to buy what he's trying to offload?' - SBOs have taken off.
With investors calling for returns and a number of investments coming to the natural end of their three- to five-year lives, there is a well-publicised wealth of private equity funds swilling around the market and plenty of deals to pass around.
The banks are playing their part too, generating high debt multiples that leave VCs salivating. But commentators admit the market runs the risk of seeing over-leveraged deals.
"At some stage leverage will go over the top," says Phil Griesbach, director of Barclays Private Equity (BPE) and head of the Midlands office. "We've already heard of some highly priced deals falling over."
Ian Tetsill, head of Barclays Leveraged Finance in the Midlands, suggests caution. "We're very careful to make sure that the ones we back justify high debt multiples and are quality assets," he says. High debt multiples are driven by the bigger end of the market, with London lenders able to syndicate large chunks of debt across a range of funders.
"And we're seeing some big deal influences coming into the mid market," says Tetsill. "There's a lot of demand for debt, and some of those now buying it are not traditional clearing banks; they're funds, often insurance companies, that find leveraged loans an attractive asset class."
The logic of SBOs starts to fall down when you examine the ultimate investors in the various funds managed by VCs - you will see many of the same names.
"The ultimate institutional shareholders may be the same in some cases," says Andy Moore, partner at Clearwater Corporate Finance in Birmingham. "But there is the attraction of a still growing business if the same factors are still there and the shareholders get similar returns second time around."
But a business can only be passed on so many times before growth potential is exhausted or private equity is no longer the best option.
"How many times can these deals churn?" asks Stuart Crebo, corporate finance director at Ernst & Young Birmingham. "The process should end with the management taking full, private ownership - a virtual circle of wealth creation. But the world isn't so simple."
As competition increases between VCs eager to invest in quality businesses, the auction process has become a new market norm, taking businesses that may previously have remained in local hands onto the national stage. Midland private equity investors find themselves bidding against London peers and trade buyers, increasing competition and driving up prices.
Advisers love auctions, but some VCs, such as Griesbach at BPE, say they "waste everyone's time: you can spend time looking at a business along with 20 other VCs and the way to win is to bid highest".
For Ted Bell, investor for the Midlands at Close Brothers Private Equity, auctions throw up interesting opportunities - when they fall apart. "A number of businesses we've acquired have come to light after a failed process," he says.
"Only when a buyer gains exclusivity does vital information come to light, and when the dirty laundry is aired that buyer may back off. We come in clean, with the issues already on the table and the price expectations already managed."
The increase in SBOs and the prevalence of competitive auctions is pushing up prices and, in some cases, pushing out trade buyers. Make no mistake: trade buyers are back.
"Over the last 18 months there's been an increasing number of trade buyers approaching businesses on an unsolicited basis, though not at the heady level of the late 90s," says Andrew Durbin, corporate finance partner at Smith Cooper Corporate Finance in Derby.
"Private equity has come in with more money at auction. But in an auction process, if we've identified genuine strategic buyers for the business, that buyer will ultimately pay more than a private equity group," says Moore.
"We're seeing good prices fetched by overseas buyers."
As with any transaction, not all businesses will be suitable for an SBO, but the criteria are similar to those for an initial management buyout.
"If the incumbent VCs are happy with the track record, you will often get a management team that is au fait with the business and clear what managing a private equity-based business is about," says Martin Draper, regional director at LDC in Birmingham.
Most players expect the rise of the SBO to continue unchecked for some time to come. But while the old-fashioned primary buyout is in decline, most investors would like to see more of them. "The challenge is to get out there and find them," says Bell. "It's too easy for VC and corporate finance advisers to look at other portfolios, rather than finding new buyouts."
But the most worrying concern raised about the proliferation of SBOs is that Midland companies and investments are increasingly being sold to London investors.
"There've been many SBOs nationally, but not a huge amount within the Midlands of a local VC sending a deal to another," says Tetsill.
"It's a big pool down there in London. If VCs buy and sell locally it keeps work in town and the advisers and bankers are fed. If a business goes to auction it becomes a national game"
Taking back control
Alternative forms of secondary buyouts (SBOs), those funded solely through debt and management or through asset-based lending, create opportunities for companies that want to take back control or for younger members of management that want to claim their place at the helm.
"One of the reasons for the growth in SBOs is the different types of financing techniques available," says Simon Chapman, director at Baker Tilly in Birmingham. "It could be a business that's had a lot of the easy wins and the cost savings have already happened - it will grow moderately but not make great returns. New techniques can address that, such as integrated finance or blended finance products, which allow an SBO to happen for businesses that wouldn't make the capital gain that a venture capitalist (VC) is looking for."
Asset-based lender Enterprise Finance Europe (EFE) has backed transactions such as Birmingham-based Total Supply Solutions' buyout from venture capitalist LDC in March. "The ones we've financed have tended to be where management is looking to get control back when the VC is coming towards the end of its investment and a trade buyer or an initial public offering are not realistic options," says EFE director in the Midlands Ian Bath.
"It reinvigorates management because they are working for themselves rather than for VCs. We tend to find that these businesses have the discipline that is imposed by a VC, which means that there's financial reporting and the systems are very strong so we have the confidence to stretch the assets that bit further."
In Nottingham, plumbing and heating business Robert Prettie completed an SBO in August 2004 that represented the completion of a process that began with the exit of Barclays Ventures (BV) in 2003. BV invested in the business in 1999 and a management buyout in 2003 saw the founders take control, with the help of the Royal Bank of Scotland (RBS). Last year a management team advised by Smith Cooper Corporate Finance and led by Mark Murphy, who had been with the business for a number of years, took over.
"It was always going to be a natural step," says Murphy. "We hope to do the same in the future with the management coming through below us. The staff can see the benefits and see a management team they can talk to who are doing things a bit better. It wasn't that long ago that I was in these people's shoes. If there was another buyout in five years' time by management they've grown up with, they wouldn't see it as a problem."
And no longer being under VC ownership has its benefits. "There's less pressure because, although you owe money to the bank, you're doing everything for yourself," he says.
Another bite of the Midlands cherry
Gala
Nottingham-based bingo and casino group Gala has reached the heady heights of quarternary buyout status. In August Permira became the fourth private equity investor to take an equity stake in the group when it invested £3200m to join Candover and Cinven, backers of a £31.24bn buyout in Febraury 2003. This year's deal valued Gala at £31.89bn and the group just keeps on growing. In October the backers helped Gala acquire Coral Eurobet, the bookmaker and internet gaming operator.
Denby
Denby, the famous Derbyshire pottery group, was the subject of a £348m secondary buyout backed by Bank of Scotland Corporate in December 2004. Over the years the company has seen a management buyout (MBO) backed by 3i in 1990, a flotation in 1994 and a take-private by Phildrew Ventures in 1999.
Fosbel
In August 2005 Barclays Private Equity sold its investment in Fosbel, the Birmingham-based leader in ceramic technology, to American Capital Strategies, a US buyout and mezzanine firm. The £357m deal gave Barclays a return of over four times its original investment, a £320m MBO in July 2003. Fosbel's turnover has increased from £323m in 2002 to £348m in the current year.
Britax Childcare
US private equity house the Carlyle Group paid £3230m after an auction for Andover-based Britax Childcare, a division of Warwick safety seat manufacturer Britax International, four years after a high-profile take-private of the group by Royal Bank Private Equity for £3441m. The Birmingham office of Barclays Leveraged Finance helped fund the deal in September 2005.
The Works
In April 2005 Hermes Private Equity in London backed the secondary buyout of The Works, retailer of value books and artist materials based in Sutton Coldfield, in a £350m deal that provided an exit for Primary Capital, backer of a 2003 MBO. The Works, led by managing director Chris Maddox, has a turnover over £390m and around 230 stores.
Total Supply Solutions
The logistics and distribution services business whose core business - Component Logistics - is based in Birmingham, raised funding in March to effect an exit from LDC. The funding, a mix of asset-based lending, cash flow and trade finance facilities, was provided by Enterprise Finance Europe.