Lower valuations to boost UK private equity deals

Tuesday, January 25, 2011 | Posted by: Grant Thornton
Categories: Economy, Financing | Tags: business, media, investment, finance, technology, UK, M&A, debt, financing, Private Equity, PE Barometer, privately held businesses, refinancing, Healthcare, valuation

So says Grant Thornton’s latest Private Equity Barometer. Read on for the key stats from our quarterly survey of more than 100 private equity executives in the UK…

• Deal volumes: 63% of respondents expect to see an increase in the volume of new investments in the coming 12 months, with respondents expecting valuations to drop significantly. Only 33% believe deal volumes will stay the same, while less than 4% predict a decrease.
• Growing shift to new investments: “A growing number of private equity groups are shifting their focus from portfolio management and exits to making new investments. They are keen to take advantage of an expected drop in valuations in 2011,” said Mo Merali, head of Private Equity at Grant Thornton UK LLP.
• Lower valuations: Over the last quarter private equity groups have significantly lowered their views on valuations for 2011 in all sectors with the exception of high technology and healthcare.
• Remaining high: Healthcare are valuations expected to stay the same at 7.2xEBITDA; high tech is expected to rise 18% to 7.7xEBITDA (Q3: 6.5xEBITDA).
• Expected to fall: Respondents expect to see the largest drop in valuations of companies in the materials and chemicals sector with multiples falling 18% to 5xEBITDA in 2011, from the 6.1xEBITDA predicted in Q3. Expectations for media and communication companies decreased by 13% to 6.8xEBITDA (Q3: 7.8xEBITDA).
• Debt: Private equity groups will need to raise more than £3 billion of debt to fund new deals in the UK this year. 15% of respondents say they need to raise more than £100 million in debt to support their deal activity in the UK over the coming 12 months. More than 22% need to raise between £50 million and £100 million of debt, while 16% need to raise £25 million to £50 million. 37% expect their debt requirements to be below £25 million, while 9% expect to finance their UK deal activity entirely with equity this year.
• Portfolio performance: More than 55% of respondents expect their portfolio companies to meet targets over the next 12 months, while nearly 30% expect targets to be exceeded. Only 15% expect their portfolio companies to slightly fall short of targets.
• Refinancing: 41% of respondents apparently do not need to refinance any portfolio companies in the next 6 months, while a further 40% need to refinance less than one in every ten companies. By contrast, only 5% of respondents concede that they need to refinance more than a quarter of their portfolio and 14% need to refinance between 10% and 24%.
• Exits: Private equity groups have also cut the number of businesses that they plan to sell - 14% of respondents do not plan to exit any investments in the next twelve months, while 66% of respondents expect to exit less than a quarter of their portfolio companies. Only 20% plan to exit more than a quarter of their portfolio companies.

Mo Merali, head of Private Equity at Grant Thornton UK LLP, said:

“A focus on the investment portfolio over the last couple of years is yielding fruit for Private Equity firms as there is significantly more stability in portfolio company performance and the trickle of exits is now turning into a more sustained flow. The immediate need to refinance has also reduced and focus is most definitely on new investments. This is reflected in the pick up in activities that we are seeing in deal-flow.”

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