Flurry of deals gives private equity new hope

A RETURN to buoyancy for private equity could be just around the corner following a flurry of deals that promises to give new hope to an industry left treading water at the end of 2009.

Yesterday Jon Moulton’s Better Capital fund announced its inaugural deal, buying aerospace supplier Gardner Group for £20m. It is the first in what could be a string of transactions for the industry veteran’s new venture.

The announcement comes hot on the heels of Advent International’s £190m purchase last week of pension services and employee benefits business Xafinity from Duke Street, Intermediate Capital Group’s £440m takeover of legal services firm CPA Global not to mention Kohlberg Kravis Roberts’ bumper £995m Pets at Home buyout. It was a rush of deals that instantly fuelled expectations in the market of more to come.

However, despite looking good compared with the low base of activity in recent months, figures released by
Thomson Reuters yesterday revealed just $5.8bn (£3.6bn) of private equity-backed M&A was completed during January, the lowest monthly total since April 2009 when deal activity totalled $2.1bn.

Of that, three of the top five largest worldwide transactions were in the retail industry, with KKR’s Pets at Home transaction the biggest of the month.

Nevertheless, there is strong anecdotal evidence that more deals are in the pipeline, particularly now the debt markets are open for business again.

Over lunch this week with Peter Brooks, a managing director at Lloyds Development Capital – the private equity arm of Lloyds Banking Group – I discovered someone else who is bullish on this year’s outlook, albeit with the caveat that the fragile macroeconomic picture in the UK presents the biggest risk to a full blown recovery.

Another private equity industry practitioner, Lincoln International managing director Darren Redmayne, is also positive but reckons the outlook remains mixed.

He warns that what is holding back more deals is unattractive valuations. In essence, vendors are setting too high
a price for their businesses. Another factor may be that some private equity funds are still struggling to raise enough capital to get back into the market. Others are looking at IPOs, often seen as less preferable to a sale.

Still with mid-market private equity firms understood to be sitting on £10bn of funds to invest, investors could be forgiven for wondering what their management fees are being spent on and calling for more action. While the weakness experienced when the market was flat at the end of last year is beginning to dissipate, private equity investors would do well to remember one swallow does not make a summer.