Fusion Corporate Partners

  The volume and value of deals completed during the first nine months of 2011 in the lower mid- market investment space has increased year on year for the past three years, according to research from Lyceum Capital and Cass Business School.

For more information, visit the Lyceum Dashboard

Data from The UK Growth Buyout Dashboard – a quarterly analysis of UK-headquartered private equity control deals in the £10 million to £100 million segment – shows that 63 transactions completed between 1 January 2011 and 30 September 2011. This compares to 50 investments for the same period of 2010 and just 25 during the first nine months of 2009.

During Q3 2011, deal volume has built on an encouraging first six months of 2011 with a greater number of deals completed than in Q2. The combined value of those deals fell slightly (from £794 million to £785 million) but both volume and value of deals was still higher than the same quarter of 2010.

Q3 deal value being lower than Q2 despite five more transactions, indicates that there are fewer large deal opportunities however the lower mid-market continues to replenish itself as new businesses enter the space looking to grow with private equity investment.

Transaction sizes

The combined deal value of £785 million exceeds the £698 million recorded during Q3 2010 and the £220 million of Q3 2009.

The highest transaction value recorded in the last three months was £87.8 million, compared to a high of £100 million in Q2 H1 2010.

Meanwhile, transactions valued between £50 million and £100 million fell from seven in Q2 to five in Q3. The majority of the 22 lower mid-market deals completed were in the £26 million – £50 million range, with 86 per cent under £50 million.

The increase in deal activity indicates that there is a growing appetite for investment and that transactions should continue to rise unless there is a significant reversal in the state of the wider economy. There may not currently be the appetite for the larger end deals in the mid-market space but as long as volume maintains its upward trend, the necessary deal flow which keeps the market moving does exist.

Transaction types

Management buyouts (MBOs) and secondary buyouts (SBOs) remained the most prevalent transaction types for private equity investors, but the number of MBOs completed in Q3 2011 actually fell to nine from 12 in Q3 2010 – lower than each of the previous six quarters back to Q1 2010.

There were also two public to private delistings during Q3, compared to one in each of the previous two quarters.

No Initial Public Offerings (IPOs) were recorded, a trend which stretches back to Q1 of 2010 and is unsurprising in a financial climate of weak capital markets where so many anticipated floats have been shelved.

Trade, IPO and secondary exits

A total of nine secondary buy-outs (SBOs) characterised the quarter – the highest number of any quarter during the last two years and an indication that private equity firms are now beginning to sell assets that they have held onto throughout the depths of the economic downturn.

There were six exits to trade, higher than the previous two quarters but lower than the eight which took place in Q3 2010.

Investments by industry

Technology, media, telecommunications (TMT) businesses continue to dominate the lower mid- market with eight out of 22 deals this quarter (38 per cent) and five transactions in business support services.

Retail – undoubtedly one of the sectors hardest hit by a dip in consumer spending – continues an encouraging run of three deals or more completing in every quarter since Q2 2010.

Commentary

Andrew Aylwin, Partner at Lyceum Capital, said: “In the £10m to £100m value range, UK private equity deal volumes continue to recover. With 63 completed transactions so far for the 9 months to 30th September, the market is trending back to historical norms of 100+ control deals a year. The UK lower mid-market segment remains a plentiful source of high quality opportunities across a range of sectors and private equity firms such as Lyceum Capital continue to play a key role in supporting dynamic companies that need capital to continue their successful development and drive the recovery of UK plc.”

Professor Scott Moeller at Cass Business School commented further: “This performance of the UK lower- mid market in the third quarter is in distinct contrast to the overall market when much larger deals of £100 million plus are considered. That market has declined during the past two quarters and some reports show it declining dramatically in Q3 – Bloomberg, for example, this week reported a 43 per cent decline in deals with European purchasers for the overall market. Therefore, the volume of deals in the lower mid market is encouraging in this difficult economic environment, and may prove in the next quarter to continue to be resilient. There is further evidence in our figures of a positive shift in the market with a strong mix of industries, including healthcare, which was absent last quarter and a resurgence in technology deals.”

Other Research Reports:

• Half Year Mergers and Acquisitions Trends Report for Private Equity in the Information Industry Posted on August 1, 2011
• Half Year M&A Trends Report for the Financial Technology and Information Industry Posted on July 19, 2011
• Berkery Noyes releases its Half Year M&A Trends Report for the Online & Mobile Industry Posted on July 18, 2011
• Survey of Private Equity fund managers indicates improved optimism – Rothstein Kass’s Private Equity in 2011 report Posted on May 30, 2011
• Internet Advertising Revenues Hit $7.3 Billion in Q1 ’11 Highest First-Quarter Revenue Level on Record According to IAB and PwC Posted on May 30, 2011
• VC Funding in the solar sector off to a Strong Start With Q1 Coming in at $658 Million From Mercom Capital Group – April 12, 2011
• UK Buyout market registers strongest quarter in two years From Lyceum Capital and Cass Business School’s UK Growth Buyout Dashboard – April 8, 2011
• JEGI releases its Media and Information M&A report for Q1 2011 – From Jordan Edmiston Group’s Media and Information M&A report – April 1, 2011
• Investments in green companies and technologies globally now total more than $2 trillion – From Ethical Markets Media‘S The Green Transition Scoreboard – February 22, 2011
• Market Research Report – 2010 Private Equity in the Information Industry Merger & Acquisition Trends – Valuation Metrics up 53% from 2009 – From Berkery Noyes Private Equity in the Information Industry M&A Trends Report – February 4, 2011
• US entertainment and media M&A activity has outpaced the overall US deal market in 2010 – From PwC US – January 31, 2011
• US Financial Technology & Information Industry M&A trends report shows deal value has grown by 27% since 2009 – From Berkery Noyes  2010 Financial Technology & Information M&A Trends Report – January 19, 2011
• Research shows smaller buyouts bounce back in 2010 – From Lyceum Capital and Cass Business School’s UK Growth Buyout Dashboard – January 11, 2011
• US information industry M&A report shows deal value and volume Up 36% – From Berkery Noyes 2010 Information Market M&A Trends Report – January 7, 2011
• AdMedia Partners survey forecasts an increase in traditional media and digital media M&A and improved multiples – The AdMedia Partners annual survey of senior executives – December 30, 2010

Data from Lyceum Capital and Cass Business School’s UK Growth Buyout Dashboard shows that 23 smaller private equity buyouts worth an aggregate £828 million* completed between 1 January and 31 March 2011 – the highest volume and value seen in any single quarter during the past two years.

This quarterly trend analysis of private equity transactions in the £10 million to £100 million segment highlights a continuing upward trend and represents a strong start to the year.

The report’s authors say the figures reflect growing confidence and appetite amongst investors to support businesses which, having proven their resilience during the downturn, and are now well placed to harness emerging growth opportunities.

Number of investments

Whilst 11 transactions in the £10-25 million value range make up 48% of all mid-market ativity, the 12 deals completed in the £26-100 million range was a higher volume than has been seen any quarter during the previous two years .

Type of investments

Management buyouts (MBOs) continued to be the most prevalent transaction type in Q1 2011, accounting for 61% of all activity (14 of the 23 deals). However the data also illustrates that there has been a sharp rise in the number of secondary buyouts.

Eight SBOs completed – the highest volume of this type of deal in any quarter over the last two years and accounts for a third of all transations completed in Q1 2011.

The reports authors believe this rise was expected given the increased number of larger deals recorded and that the trend reflects the number of private equity houses continuing to rely on old-style intermediary-based deal sourcing, rather than research-led direct origination.

Only one public-to-private transaction was launched in the quarter, underlining the lack of appetite for de-listings within the mid-market.

This lack of interest is unlikely to improve given the recently announced proposals to change the Takeover Code.

Investments by industry

Technology, media, telecommunications (TMT) businesses attracted the most private equity investment in the quarter, with the seven deals completed in the sector accounting for 30% of all deals in Q1 2011.

This is a sharp rise in activity from previous quarters (Q4 2010: 3, Q3 2010: 2), continuing an underlying trend which saw the annual number of deals involving TMT businesses nearly treble from four in 2009 to 11 in 2010.

The other sector showing increased activity is retail and consumer, in which more deals were transacted (four) than in any other quarter over the past two years.

Trade, IPO and Secondary Exits

The first quarter of 2011 has seen the number of exits from private equity investments remain relatively steady with 11 deals completing in Q1 compared to an average of 10 over the previous four quarters.

Whilst trade dominated the buyer pool throughout 2009 and 2010, the first quarter of 2011 has seen this trend reverse, with the majority of exits (73%) being provided by eight secondary buyouts.

With just four exits through trade buyers, Q1 2011 has seen the lowest level of trade activity registered since Q4 2009.

The reports authors suggest that this trend reflects an increasing number of sponsors returning to market following the downturn looking to quickly deploy capital in mature private-equity backed assets.

Commentary

Commenting on the report, Andrew Aylwin, Partner at Lyceum Capital, said: “Optimism or pressure to invest? Whatever the reason, activity was up again in Q1. If this trend continues, we may see a hundred new deals this year, up from 68 last year and just 35 in 2009.

“But with prices on the rise, managers in the lower mid-market are working hard to understand investment risk, with deal processes drawn-out as a consequence.

“It’s too early to tell whether 2011 will yield a good vintage, but the market is clearly testing investment selection today with value-adding skills in the spotlight next.”

Scot Moeller, Professor in the Practice of Finance at Cass Business School, said: “It is notable that the first quarter’s activity in this lower middle market has been broader based than last year in terms of both industry sectors and size of deal.

“When combined with the consistently higher deal flow since early 2009, this should be a good indicator of continued strong deal flow in the next several quarters although the market is clearly still at a point where participants expect surprises.

“Particular strengths are currently in the technology sector, including software, as businesses gear up with the continuing improved outlook for the economy; these two sectors should continue to see increasing activity in 2011.”

For more information go to the The Cass/Lyceum Capital UK Growth Buyout Dashboard

*All figures for aggregate enterprise value of private equity investments are based on confirmed values from Experian’s CorpFin database and additional estimations by Lyceum Capital and Cass Business School where undisclosed.