Private equity firms abandon company sales and prepare for a wave of bolt-on acquisitions

UK private equity firms are preparing for a spree of bolt on acquisitions as the global credit crunch reduces company valuations. However, firms are delaying the sale of their own investments as uncertainty on pricing persists, according to a new survey from BDO Corporate Finance.

The survey shows that 96 per cent of private equity investors believe that the credit crunch has resulted in the industry reducing the prices it will pay for businesses. However, investors are divided on how far valuations have fallen, which is contributing to uncertainty on pricing in the market.  27 per cent of private equity respondents said they had reduced company prices by more than 20 per cent while 36 per cent said they had reduced prices marginally by only 5 to 10 per cent.

Economic conditions have also increased the length of time that private equity firms are holding onto their investments. According to the survey, 91 per cent of private equity firms now expect their investment holding periods to increase as a result of the credit crunch. 71 per cent of private equity firms said they had already delayed commencing a sale process because of this and 95 per cent of these respondents said that this delay was more than a year.

Despite the uncertainty, businesses backed by private equity are keen to be involved in M&A activity. The survey states that 51 per cent of private equity backed companies expect to acquire another business prior to being sold on. This appetite for “bolt on” acquisitions is also supported by private equity firms where 97 per cent expect at least one in four of the companies in their portfolio to undertake a bolt-on prior to exit and 70 per cent say that they expect to conduct bolt-on acquisitions in at least half of their portfolio companies.

Alex White, corporate finance partner at BDO LLP said: “The private equity market is deeply divided on company valuations and uncertainty about value has led to sales being put on hold. This could be a mistake if valuations converge downwards in the next few years. There is therefore a strong argument for company owners to sell now despite the uncertainty because a significant number of buyers are still paying reasonable prices.”

He continued: “Although private equity company sales are slowing, there is a massive demand to bolt on acquisitions to existing investments. There are over 1200 mid-market private equity portfolio companies and bolt-on deals will underpin a lot of M&A in the mid-market for the next few years.”

The Private Equity Mid-Market survey explores the views of private equity firms and 100 UK mid-market companies backed by private equity.

ENDS

Notes to editors:

For more information contact Stephanie Aneto in the BDO press office on 020 7893 3073, Email: stephanie.aneto@bdo.co.uk

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