LONDON: Cash-rich corporates did much better than private buyout firms in completing deals in the UK in the third quarter, a survey by professional services firm BDO showed.
The number of private equity deals completed in the three months to September fell for a third consecutive quarter, reflecting difficulties in finding funding as well as a dearth of high-quality businesses, BDO said.
The private equity deal total dropped to 77 from 86 in the June quarter, while the number of trade acquisitions by companies rose to 466 from 435, the highest level since the third quarter of 2011.
The private equity sector has had a lean time since the financial crisis as the flow of cash from banks that helped to finance billion dollar corporate deals virtually dried up. Buyout firms typically buy underperforming companies to shake them up to sell or float them at a profit.
Private equity firms now need to provide around 70 percent equity compared with 40 percent in the past, so they must look for the best-performing companies to generate enough money for investors promised double-digit returns, the report said.
“Given that this structure relies more heavily on strong earnings potential to provide sufficient returns, private equity companies are struggling to compete with corporates,” said Peter Hemington, M&A partner at BDO.
Competition between corporates and buyout firms for the best deals has pushed down pricing for the former and up for the latter.
During the third quarter, private equity buyers paid an average price relative to earnings (p/e) multiple of 13.3, up 11 percent from 12.0 in the second quarter of 2012, the survey said.
Trade buyers, on the other hand, paid an average p/e multiple of 13.1, down marginally from 13.3 in Q2.
The survey found some regional disparity with London and the South-East experiencing its lowest volume of private equity transactions for over two years but the North and Scotland seeing stable deal flow compared to the previous quarter.
Future improvement in private equity deal flow may come from secondary buyouts, where buyout firms sell companies between themselves, said BDO.
Cash-rich corporates win deals in private equity slump
