-Recovery in deal flow across UK lower mid-market (£10 million-£100 million) continues in Q1 with 20 transactions and aggregate value of £710 million
-Segment outperforming total European buyout market, which remains constrained by Eurozone crisis and credit squeeze
-Significant rise in transaction activity in support services sector as corporate efficiency agenda gathers momentum
-Figures paint a picture of resilience and stability for private equity investment in UK SMEs

The recovery in private equity’s UK lower mid-market continued during the first quarter of 2012 despite the sharp decline in transaction activity across the wider European buyout market.

According to Lyceum Capital and Cass Business School’s UK Growth Buyout Dashboard, the quarterly analysis of UK-headquartered private equity control deals in the £10 million to £100 million enterprise value range, a total of 20 deals completed across the segment during the first three months of the year with an aggregate value of £710 million.

Although representing a reduction in deal volume and value on the previous quarter — when a two year record of 27 deals completed worth £789 million — the figures were 25% ahead of average levels during 2010 and consistent with most quarters during 2011.

This, said the report, provided a contrast to the more constrained European buyout market, which recorded a sharp decline in total deal value of 31% and volume of 30% during the same period*, highlighting the resilience of the UK’s lower mid-market investors and its population of SMEs in the face of Eurozone crises, low growth and reduced liquidity.

The report also showed a significant increase in private equity investment in the UK’s support services sector, which it said highlighted the growing momentum of the corporate efficiency agenda as large enterprises battle a combination of slow growth and rising costs.

Deal values

Deals in the £10 million to £50 million value sub-range continued to dominate in the first three months of 2012, comprising 75% of all buyouts in the segment. The average deal value in Q1 2012 rose to £35 million, up from £29 million during the previous quarter.

Type of investments

The data confirms that primary buyouts remain a key source of deal flow in the value range, with 16 management buyouts (MBO) completed during the first quarter of this year representing over 80% of deals in the lower mid-market, compared to 67% of all transactions in Q4 2011.

In line with the wider transaction arena, the lower mid-market saw a fall in secondary buyout volumes in Q1 2012. Having seen an average of six per quarter throughout 2011, there were just three in the first three months of this year.

Investments by industry

Transactions involving companies operating in the UK’s support services sector accounted for 40% of all activity in the range, highlighting the important role that SMEs are playing in the corporate efficiency agenda.

Retail and leisure businesses also remained active in Q1, with a particular focus on aspirational brands and distressed assets which had suffered as a result of reduced consumer disposable income and rising unemployment. There were six buyouts in the sector, representing 30%of all deals.

Exits

There were six exits in the first three months of this year compared to 10 in the previous quarter and 12 during the same period in 2011, with many sponsors choosing to wait until Eurozone concerns alleviate and UK domestic growth improves further.

Exits to strategic trade buyers remained prominent, with three in the quarter and a total of 22 in the last 12 months accounting for more than 50% of total exits, confirming that corporate buyers continue to find UK lower mid-market private equity backed companies attractive additions to their groups and underlining the quality of businesses built by firms in the UK lower mid-market.

Commentary

Andrew Aylwin, Partner at Lyceum Capital, said: “Set in the context of the wider buyout market, the performance of the lower mid-market in Q1 provides further evidence of its resilience and recovery. Against a backdrop of Eurozone crises, low growth economies and a market-wide liquidity squeeze, no other segment of private equity has continued to weather the storm as effectively.

“The specific characteristics of the £10 million to £100 million range, including the reliability and quality of deal flow, its reduced reliance on leverage and the significant scope for sector consolidation, will continue to make this a rich source of investment opportunity.

“One thing is clear from the consistently strong flow of investment opportunities we see: owner managers want partners who bring more to the table than just money and generic strategies. Direct origination by knowledgeable investors who bring real operational expertise and impact along with the funding, experience and poise to exploit today’s market conditions is what target managers and selling shareholders are looking for. Focused buy-and-build strategies only serve to accelerate lower mid-market companies’ growth and position them as the real drivers of UK recovery and long-term growth.”

He added: “Firms with a track record of investing in sectors they understand well, supporting leading companies in their transformational growth plans, are particularly well placed to invest in times like these. Better still, it’s an approach that promises to become ever more relevant as the situation in the Eurozone stabilises and domestic growth improves.

Scott Moeller, Professor in the Practice of Finance at Cass Business School, added: “Put in the perspective of the overall global deal market, the lower mid-market shows a consistency of activity which is lacking amongst larger deals — and where the first quarter showed a marked decline in activity levels not seen for almost a decade.”

“There has been significant volatility in the overall M&A; market and a particular weakness both domestically and internationally in deals above £100 million in size which has been reflected in the IPO markets as well. The continuing strength of the lower mid-market is a testament to the importance of this growth segment to the economy overall as it emerges from the downturn of the past several years.”

*According to data published by unquote and Arle Capital for Q1 2012, there were 157 private equity-backed deals worth a total of €8.1 billion in Q1 2012 in Europe, down from 223 transactions totalling €11.8 billion in the previous quarter — a fall of to 30% and 31% respectively.