United Kingdom
Increased Q2 deal activity provides grounds for cautious optimism - Christopher Clark
PCPI Q2 shows the total number of transactions increased from 496 to 543 in Q2, which I think provides cause for cautious optimism. The growth in deals is most likely due to greater certainty provided by having a new government in place and an emergency budget that was broadly supportive of the business community.
However, because of the length of time deals take to complete, the M&A market will not see a significant uplift in the number of deals until late Q4 or Q1 2011. In tandem, the Private Equity Price Index fell from 13.3x to 11.3x. This is due to the absence of much needed mega deals that has bolstered previous quarters’ prices.
Increasing demand from corporate buyers could push up pricing and help to reduce the pricing gap that currently exists between buyers and sellers that has kept deal volumes at historic low levels. As economic confidence builds, this will also improve the appetite of the banking community to fund transactions and, in conjunction with the private equity community, this could push prices higher, as demand will outweigh supply for a period of time until vendors feel confident in commencing a sale process.
In addition, the Financial Times Non-Financials Index fell from 14.8x in Q1 2010 to 12.5x in Q2, moving back in line with private company pricing. This, alongside high volatility in the stock market since Q2 2008, has led to large swings in values for public companies which make predicting valuations based on public companies extremely challenging.
I think that despite a fragile recovery and cuts in public spending, businesses now have greater certainty following the General Election and subsequent emergency budget. This, alongside the growth predicted by leading forecasters, means businesses can be more certain in their own future, providing confidence to commence acquisition plans.
However, because of low pricing, vendors don't see it as a good market to sell at the moment. Given this constrains supply, it pushes pricing up on those assets that are available. At some point this will give vendors comfort and reassure them that they can achieve a suitable price, but this will take time.