RESEARCH SHOWS LARGE-CAP PRIVATE EQUITY GROUPS INCREASING PENETRATION INTO THE MID-MARKET

Post credit crunch surge in acquisitions of mid-cap assets set to increase in 2011

18 November 2011, London - In the three years since the credit crunch, the activity levels of large cap private equity groups in the European mid-market has increased by 72% when compared to the three years prior, according to research by DC Advisory Partners (‘DC’), formerly Close Brothers Corporate Finance.

DC analysed mid-market acquisitions¹ made by 16 leading large-cap private equity groups² from 2005 to 2010 inclusive. The findings show that the 16 private equity groups have made 423 acquisitions, 253 of which (60%) have been bolt-on acquisitions³, with the remaining 170 (40%) being primary transactions.

The average percentage of primary transactions executed by large cap private equity groups that were below £500m in the three years prior to the ‘credit crunch’ was 29%. In the three years since the credit crunch (2008-2010) this figure has risen to 50% - a percentage difference of 72%. This compares with a long-term average over the last six years of 40%.

The research also shows that in spite of the volume of transactions in 2010 increasing to pre-crunch levels (Chart 1), the modal average value⁴ of large cap private equity transactions has continued to fall, from £500m in 2008 to £250m in 2010.

Commenting on the findings, Simon Tilley, Head of DC Advisory Partners’ Financial Sponsors Coverage Group, said:

“Our research confirms what the market has until now suspected but never quantified; that large cap private equity groups are increasingly focused on the mid-market for primary acquisitions. The fact that the modal deal value continues to drop points to the trend gaining momentum.

“The mid-market is where the deal flow continues to be and these private equity groups have been attracted by well priced, high quality assets with a strong track record through the recession where they see an excellent opportunity to generate significant growth over the medium-term.”

According to DC Advisory Partners the trend has been driven by a combination of mid-market assets having lower ratings than their large cap counterparts; the return of liquidity in the debt markets, particularly for mid-market transactions; and the €1 trillion of capital that private equity groups raised between 2005-2007⁵, which needs to be invested before investment deadlines expire.

Simon Tilley commented:

“Many of these large cap private equity groups originate from the mid-market and so are going back to valuation territory they know well. Competition is fierce to invest current funds ahead of the next fundraising cycle. To date the mid-market has proven to be an excellent market for the large cap private equity houses. But competition is hotting up and value expectations for the best, and particularly the most scaleable assets, remains high. We expect this trend to accelerate in 2011.”

Table 1: Volumes and values of large-cap private equity transaction in the mid-market 2005-2010 inclusive

Mid-market transactions that large cap private equity groups have recently conducted include:

Blackstone’s acquisition of Independent Clinical Services; Warburg Pincus’ acquisition of Survitec, a leading safety and survival equipment manufacturer; and KKR on its investment in Nordic hospitals group, Ambea.

-ENDS-

Notes to editors:

1. Mid-market acquisitions defined as under £500m enterprise value
2. Large-cap private equity groups defined as those with a current fund over £4.5 billion

• CVC 
• Cinven
• Permira
• KKR
• Apax
• BC Partners
• Blackstone
• TPG
• Warburg Pincus
• Bain
• Hellman & Friedman
• Teachers
• Apollo
• CD&R
• Providence
• Terra Firma

1. Bolt-on acquisitions defined as acquisitions made through portfolio companies
2. The modal average shows the most frequent transaction sizes in a given year. This strips out large one-off transactions that skew the averages
3. Source: Prequin