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.
Fusion Corporate Partners 
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