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Banking and Finance

West Midlands’ buy-out market increases despite the year’s political and economic uncertainties

Will Copeland, Equistone Partners Europe

The West Midlands’ private equity-backed buy-out market held up in 2019 with an increase in the number of deals recorded in the year although the average deal value fell according to provisional full-year data from the Centre for Management Buy-Out Research (CMBOR) at Imperial College Business School, sponsored by Equistone Partners Europe and Investec Corporate and Investment Banking.

There were 17 deals in the year involving businesses head-quartered in the region – up from 11 in 2018 – with a total value of £1,426m, up by nearly six-per cent from the 2019 figure of £1,347m. Average deal value stood at £84m compared to £122m in 2018.

The values were however, distorted by the largest deal of the year, that of the buy-in of Ontic from BBA Aviation in November in a deal valued at £1,009m.

Ten of the deals in the region were below £25m with five between £25m and £100m.  As in recent years, by number, manufacturing companies dominated the field. One-third of all deals recorded in 2019 were in manufacturing – a similar proportion to 2018.

The exit market, however, was much quieter.  There were just four exits in the year of which one was by secondary buy-out, two by trade sale and the fourth as a creditor exit. The total realised was £38m. This contrasts with 12 exits in 2018 with a combined value of £2,098m.

This trend was reflected across the UK which saw a 76 per cent drop in UK exits by value as private equity managers became more likely to hold on to assets.

Will Copeland, from the Birmingham office of Equistone Partners Europe, said that despite the political and economic uncertainties during the year, the West Midlands’ market had held up better than might have been anticipated.

“Coming into 2019 there was nervousness for the buy-out market due to the ongoing political uncertainties. However, the number of buy-outs in the region, including those undisclosed, has been higher than expected.   The deals community is reporting that a number of opportunities are being prepared to bring to market subject to the economic and political landscape – which, when considering the large amounts of private equity funds available to invest in the region, suggests that if the macro environment is now more stable, we should expect to see an increase in the number and total value of buy-outs in 2020,” said Copeland.

Nationally, the UK has consolidated its position as Europe’s largest private equity market by deal value by a comfortable margin in the face of challenging conditions, with a particularly strong fourth quarter which accounted for more than half of 2019’s total value (£12.8bn of £22.9bn). The UK recorded a small year-on-year increase in deal value against a backdrop of Europe’s other major economies falling off the record pace they set in 2018.

The UK’s overall success was driven by public-to-private transactions, which made up the four largest deals, with an aggregate value of £10.7bn – almost half of the UK’s total for the year. These transactions propping up the larger end of UK deal activity were funded by US and global buyout houses – investing, in certain cases, alongside non-traditional pools of capital, such as Blackstone and the LEGO family investment vehicle KIRKBI’s joint £4.8bn take-private of Merlin Entertainment.

Christian Hess, Private Equity Client Group Head at Investec, said: “The change in mix of capital deployment this year highlights the flexibility and agility of the PE mandate of financial sponsors: public-to-private transactions have been a significant success story for the UK in 2019, bringing in huge pools of capital from global buyers.

“There are two factors behind this trend: on the one hand, public company valuations have declined, and in combination with a cheap pound, UK companies look attractive to global investors. On the other hand, traditional private equity processes such as auctions have become so competitive that buyers are more willing to look elsewhere for value.”