Limited debt funding for mid-market deals is continuing to adversely impact M&A activity, as seen by the lack of growth in deals that took place in Q1 2009.
According to our latest Private Company Price Index (PCPI), sales of privately owned UK mid-market companies fell in Q1 2009, from 543 in Q4 2008 to 493. There were 402 transactions for trade acquirers, down 11 per cent from Q4 2008, and 91 deals with private equity involvement, a marginal fall of 1 per cent within the same period.
However, increased optimism is being seen in the marketplace due to the success of a range of government and banking initiatives. Because of this, an increasing number of lending institutions are conveying a message to the professional community that they are now ‘open for business.’
The values attributed to the companies that are being bought/sold dropped again in Q1 2009. The PCPI showed that average multiples paid by trade buyers dropped 12 per cent from the last quarter to 10.1 times (sold for 10.1 times their historic after tax profits).The Private Equity Price Index (PEPI), the equivalent metric for private equity purchasers, was 10.4 times – down 10 per cent.
Private companies looking to raise finance need to ensure that they have a compelling and coherent message to take to market to gain a share of a
resource that is scarcer now than it was 18 months ago. However, while there seems to be no relaxation of credit committee parameters, certain banks are acting with more confidence and showing more willingness to look at opportunities.
All transactions are taking longer to move through credit committee than pre-crisis, which may in part explain why we have not seen an upturn in corporate lending as yet. It will take time for the banks’ appetite to fund leveraged transactions to fully feed through to the execution of deals in the pipeline. Given the higher capital cost of funding transactions from equity, it is therefore not surprising that deal pricing is down.
Whilst the reduced deal volumes and prices remain a frustration to the corporate and professional community, there are reasons to be cautiously optimistic about the future. An increasing number of blue-chip funders are actively seeking investment opportunities and whilst we acknowledge that a return to the peak in the market, evidenced in 2007 will be a long way off, the foundations are being laid for a return to normal, albeit conservative, level of funding.
If you would like to know more about the PCPI/PEPI or require assistance with raising debt finance, please contact Christopher Clark or Neil McDaid in the corporate finance team or your local BDO representative.