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Picking your targets 9 Feb 2012

Ever since the financial meltdown in 2008, private equity has been something of a balancing act. The three principles that support deals - leveraging equity with debt, exploiting higher multiples and increasing profits - have all suffered. There's less debt, there's less optimism (hurting multiples) and the economy has remained sluggish (limiting growth).

The evidence of how this has affected the PE market is there in the stats. The value of all UK private equity buyouts dropped by over a third (36%) to £12.1bn in 2011, according to the data published last month by the Centre for Management Buyout Research (CMBOR), sponsored by Equistone Partners Europe (previously Barclays Private Equity) and Ernst & Young. "With the exception of 2009, when only £4.8bn worth of buyouts took place in the immediate aftermath of 'the crash', the 2011 total value is the lowest since 1997 (£9.6bn)." Ouch.

But here's a funny thing. In its report on the European PE scene, the CMBOR figures tell a very different story. The overall value of all European buyouts totaled €59b in 2011, a 6.5% increase from €55.3 billion in 2010. And that's despite a year of turmoil for the Eurozone. (My guess? That currency turmoil made it much riskier to sit on cash - for both LPs and GPs - so there was something of a rush for assets.)

And Europe isn't the only bright(er) spot. Private equity investments in India showed significant activity in 2011 with a 23% increase in deal values over 2010, according to Grant Thornton. It says: "The resurgence could possibly be attributed to sluggish IPO & QIP activity coupled with a cautious return in confidence levels which were seen lacking in 2009 and the first half of 2010. There have been 347 PE deals in 2011 totaling a value of US$7.7bn." Impressive.

And even in the UK, it's worth seeking out the high points. The number of exits increased to 151 in 2011 (2010: 142) with a combined value of £8.5bn. That's despite zero IPOs of backed businesses. (OK, so secondary deals, with one PE firm picking up another's business, are still driving the market. But still...) And best of all for FDs and FCs looking at the mid-market for real value creation opportunities, "The upper mid-market (£100m to £500m range) declined by 40%, with £4.5bn total value in 2011 compared to £7.4bn in 2010. This is in contrast with the lower mid-market (£10m to £100m) which showed a 17% increase from £2.3bn in 2010 to £2.7bn in 2011."

In other words, it's worth looking at the right geographies, the right sectors (business and support services good; retail not so good) and - above all - the right opportunities where strong, disciplined management can still deliver growth and improve the quality of earnings.

PS: Mitt Romney's candidacy for the Republican nomination in the Presidential election has raised the profile of PE over the pond - he used to run Bain Capital. The debates on blogs have been pretty stimulating. Take this piece looking at how the regulation of banks is likely to fundamentally shift their appetite for risk - and how that affects willingness to provide debt to PE. And this primer on PE from The Epicurean Dealmaker is well worth a read.