05 July 2010

Strong and steady may win the race

The first half of 2010 was another difficult six months for M&A and private equity, and Zephyr data suggested total global M&A value reached its lowest point since 2004. However, some sectors witnessed sharp gains in deal value against the lows. Certain investment darlings are emerging and these are not the distressed assets that have been suggested.

Last week banking industry sources told Reuters that Providence Equity Partners is about to buy the Netherlands-based childcare group Catalpa, swapping its usual media, communications and IT focus for the steady revenue streams of a daycare centre and nursery operator.

The rumour illustrates a suggestion made in Grant Thornton’s most recent quarterly Private Equity Barometer – specifically that buyout firms are looking to change their sector focus. A minority of 44 per cent of those surveyed said they do not plan to invest in new industries over the coming months.

What’s more there is cash available for attractive targets: "In the face of economic uncertainty, our private equity respondents alone are planning to invest more than GBP 5,000 million in the UK in the space of a year,” said Mo Merali, head of private equity at Grant Thornton UK.

Private equity activity bottomed in H1 2009, Zephyr research results from H1 2010 suggests. The global value of leveraged deals for the six months was USD 60,739 million – representing a 16 per cent increase from USD 52,435 million in H1 2009 despite a decline in overall deal value over the same timeframe.

The good news is echoed by Grant Thornton, with Merali saying: “More than half of our respondents see a sustainable recovery in dealflow." Attractive sectors will be business support, healthcare and consumer products, Grant Thornton suggested. Almost 44 per cent of the private equity firms it surveyed said business support would be one of their most active segments in the next 12 months. Healthcare was selected by 40 per cent and consumer products and services by 38 per cent.

Zephyr’s Q1 2010 M&A Report revealed growth in private equity investment in the wholesale and retail sector. Total global investment for Q1 2010 was USD 5,037 million – almost four times the USD 1,320 million recorded in Q1 2009 and double the USD 2,620 million from H2 2009. Many sectors reviewed by Zephyr made strong gains between Q1 2009 and Q1 2010, with services among them (H1 2009: USD 10,650 million; H1 2010: USD 22,001 million).

Meanwhile, there was no corresponding upsurge in the value of private equity investment in banks (H1 2009: USD 22,161 million; H1 2010: USD 3,012 million) as overall M&A investment in the banking industry plunged 44 per cent. 

The research supports findings from Grant Thornton, and suggests turnarounds are not likely to account for a major proportion of the next 12 months’ investments. "Contrary to popular belief, very few private equity firms plan to snap up distressed assets,” Merali said. “The majority are instead focussing on their core buyout business, while taking account of new sectors."

© Zephyr 2010