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UK private equity to invest billions in next 12 months

Grant Thornton's Private Equity Barometer shows that private equity firms are planning to invest billions of pounds in the UK but are not prepared to pay above industry average.


UK private equity to invest billions in next 12 months

Grant Thornton's Private Equity Barometer shows that private equity firms are planning to invest billions of pounds in the UK but are not prepared to pay above industry average.

The quarterly survey of more than 100 private equity executives in the UK found that more than 42% expect to invest more than £50 million in the UK in the next 12 months, with nearly half that figure (20% of the total) expecting to invest more than £100 million. Almost 50% of respondents expect to invest between £11 million and £50 million, while the remaining 8% plan to invest less than £10m or not at all.

"In the face of economic uncertainty, our private equity respondents alone are planning to invest more than £5 billion in the UK in the space of a year. More than half of our respondents see a sustainable recovery in dealflow," comments Mo Merali, Head of Private Equity at Grant Thornton UK LLP.

Although 49% of respondents agree that they are under pressure to deploy funds, only 27% concede that they are prepared to acquire assets at multiples higher than their industry average.

This seems to be reflected in the modest rise of EBITDA multiples that respondents were prepared to pay for the three most coveted sectors business support services (6.4 compared to 6.2 in Q1), healthcare (8.1 compared to 7.9 in Q1) and consumer products and services (6.4 compared to 6.2 in Q1).

"Financial sponsors have paid steeper prices for recent high-profile transactions as stiff competition from trade bidders kept pushing average prices up. Yet offer prices will continue to be curbed as financial sponsors only expect to be able to secure modest average debt multiples of 3.3 in the next 12 months," Merali explained.

80% of private equity respondents are planning to complete a buyout over the coming 12 months, compared to 55% who are planning to provide development capital in return for minority stakes. By contrast, only 15% are preparing to invest in distressed assets and only 1% are expecting to invest in secondary buyouts.

"Contrary to popular belief, very few private equity firms plan to snap up distressed assets. The majority are instead focussing on their core buyout business, while taking account of new sectors."

Although 43% of private equity respondents agree that "incentives have never been greater for executives to leave their firms and set up a new fund", only 8.5% do not expect their firm to raise another fund.

"The UK continues to provide attractive opportunities for financial sponsors. Even though the recent increase in Capital Gains Tax is frustrating for those in the private equity industry, it was not unexpected and at 28% lower than many feared," concluded Merali.

A minority of 44% of respondents are not planning to change their sector focus. 43.8% of respondents said that business support services would be one of the sectors that they would be most active in the next 12 months; this is followed by healthcare, which was selected by 39.6% and by consumer products and services which 37.5% included in their selection.

75% of respondents expect to see an increase in the volume of new investments over the coming 12 months, compared to 80% who expected an increase in Q1 2010. At least 15% expect an increase by half or more.

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