By Daniel Hunter

The UK’s Private Equity (PE) buyout market proved to be the most bankable PE market in 2012, boosted by Sterling’s attractiveness as a relative safe haven for investors who are keen to continue deal making in Europe without exposing themselves to Eurozone volatility.

The value of UK buyouts has risen 23% so far this year to £15.7bn from £12.7bn in 2011, and the number of deals recorded rose slightly to 189 compared to 187 over the same period. Average deal size in the UK has also increased to £84m, up from £68m, according to the latest data published by the Centre for Management Buyout Research (CMBOR) and sponsored by Ernst & Young and Equistone Partners Europe.

The number and value of foreign divestments saw a marked increase this year, rising to 19 deals and £1.9bn compared to 15 and £1bn in 2011. Of the overseas acquirers, 13 of the businesses originated from the US, and these deals alone equated to £1.7bn.

Sachin Date, Private Equity leader for Europe, Middle East, India and Africa (EMEIA) at Ernst & Young comments, “UK buyout activity has shown real resilience in the face of macroeconomic uncertainty. The PE market in the UK is being buoyed by the relative safety that Sterling offers in light of the Eurozone crisis and has helped to make it the most bankable PE market in Europe this year. PE funds are growing increasingly worried about how the Eurozone crisis will play out and as a result the UK has benefitted and held up well compared to Europe.”

Christiian Marriott, Partner at Equistone Partners Europe, says: “The UK buyout market has remained robust in 2012, outperforming its Continental European neighbours by both volume and value of deals. Notably, there has been positive growth in the lower mid-market offering excellent deal opportunities over the course of the year.

“The UK market’s resilience is in part due to the willingness of the banks to offer financing for quality assets with promising growth potential. A handful of new entrants are increasing liquidity in the market and a few senior lenders are even considering underwriting again. This confidence and increased access to finance should further boost deal flow, allowing the UK to sustain a good level of activity into 2013.”

Buyout numbers as a percentage of UK M&A have risen to 45% in the first nine months of this year, compared to 33% in 2011. As a proportion of M&A, buyouts values have risen to 82% for the first nine months compared to 61% for the whole of 2011.

Date says, “It is positive to see private equity contributing a high percentage to the UK’s overall M&A activity in terms of value and volume. Even in a volatile market, PE houses continue to use their core skills of identifying prime assets and are bold and brave in acquiring those businesses.”

This year saw a significant rise in the number of £1bn plus ‘Mega’ buy-outs, with three deals recorded achieving a value of £3.8bn, compared to only one in 2011 at £1bn. The MBO of Iceland Foods (£1.4bn) was the largest buyout of 2012, followed by Misys (£1.2bn) and Wood Mackenzie (£1.1bn).

He continues, “In the current environment investors are seeking high quality assets with lower risk and it appears that this has manifested itself in the rising attractiveness of the £1bn plus deals this year.”

Deal activity and values in the mid market held up well in 2012. In the deal range £50m — £250m there were 39 deals equating to £4.1bn in value, versus 36 deals and £3.8bn respectively in 2011. Total number of deals so far this year in the £250m to £1bn range totalled 10 with a combined value of £6.0bn, compared to 11 and £5.8bn in 2011.

“Buyouts involving business at the mid to lower end of the value range continue to hold up well and we have seen an increase in the number and values of deals being done in the mid market,” Date adds.

Looking forward to 2013, Date says, “The PE houses have money to spend and assets to sell, appetite is strong and the debt markets are open, but corporates continue to be weighed down by a lack of confidence.

“The PE industry works at its best when corporates are acquisitive, snapping up targets and selling non-core assets to PE houses, who in turn churn their portfolios and sell assets back to corporates. With confidence low, however, businesses are choosing to sit and wait for conditions to improve before transacting, and the cycle has broken down. Until corporates come back to the deal table in a meaningful way, PE in the UK will continue to stutter along.”

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