GOOD year so far for management buy-outs or bad year? Difficult to call, but the balance seems to be that it has been a good year, that MBOs are back in fashion because there is so much money looking for deals and so many advisers knocking at doors trying to engineer deals. There are, however, signs of reticence in Scotland.
Statistics from the Centre for Management Buy-Out Research (CMBOR), the provider of analysis on the UK buy-out market founded by Barclays private equity and Deloitte, show traditional buy-outs from corporates have made a dramatic comeback, making up
more than 40 per cent of the market by value.
Tom Lamb, co-head of Barclays private equity, says: "2006 has seen the welcome return of the corporate vendor representing 43 per cent of total market value, the highest share for five years. This is great news for the private equity industry as there is a perception that so-called primary buy-outs yield much better returns than secondaries.
"Many have been increasingly concerned that the huge growth in secondaries since 2001 (from 5 per cent of the market to 37 per cent in 2005) could eventually lead to much lower overall returns as private equity consumes itself.
"The increase in corporate buy-outs appears to have been driven by the current global mergers and acquisitions boom - corporate predators often spit out the unwanted parts of acquisitions in the form of buy-outs."
Since the start of the year there has been a lot of confidence in the public arena, with big private equity plays being rebuffed. Mark Pacitti, corporate finance partner at Deloitte, explains: "We have seen a huge dip in public to private deals in 2006, with a value of only £1.5 billion completed so far compared with £5.2bn for the same period last year, a dramatic decrease.
"Public company shareholders have proved incredibly resilient to private equity advances this year and the drop in public to private completions makes up most of the £4bn fall in deal value (£13bn down to £9bn)."
One Scottish outfit which deals solely in MBOs, Dunedin Capital Partners, successfully launched this month a second buy-out fund which was significantly oversubscribed. It hoped to raise £200 million - and brought in £250m.
The money was raised from a total of 21 investors, including 15 new investors, around half within the UK and the rest in Europe, no doubt attracted by Dunedin's track record but, according to Dunedin, also by the appeal of UK buy-outs.
Since 1996, Dunedin has backed 32 buy-outs and says it has delivered superior returns to investors through investments in buy-outs where growth is facilitated by roll-out, buy and build acquisition strategies. Dunedin chief executive Ross Marshall says it looks at about 250 possible deals a year, but under 10 per cent are from Scotland.
"It should not be a surprise that we are a bit disappointed that there is not more activity in the Scottish market, although there is a very viable oil and gas sector and there is probably a reasonable level of activity in the smaller companies," he says.
"I think there are plenty of people looking. We are always looking for good businesses and I am sure other corporate finance houses and lawyers are looking to try to do something."
Dunedin is classified as a UK mid-market private equity house and it is private equity which is driving the deals market.
Another development this month which underlined the growth and hunger of private equity was the announcement by the Glasgow-based Scottish Equity Partners (SEP) that, for the second time in five years, it had raised more than £100m in Europe for a venture capital fund.
SEP now has one of Europe's largest and most experienced venture capital investment teams. It focuses on investments in the early stages and emerging growth companies throughout the UK in information technology, healthcare and energy- related technology sectors.
It now has funds under management of more that £300m, and its investors include Scottish Widows and the Strathclyde Pension Fund, whose chief pensions officer, David Crum, says: "SEP gives us exposure to global venture capital and access to arguably one of the best, if not the best, UK venture capital firms."
Jimmy Williamson, head of structural finance at Lloyds TSB Scotland, says managements now had access to a lot of private equity capital for MBOs which are regarded as one of the lower risk areas for private equity.
He adds that Scotland does not seem to have benefited from that growth of private equity and he is not sure why.
He says: "What we have seen in recent times is a trend for London-based private equity houses to do business in Scotland and this is not a bad thing. It is a very competitive market. Our business model is not to take equity but to come in with mezzanine finance, but if we have to take equity it would be between 1 and 5 per cent."
This means that private equity and banks support managements in Scotland elsewhere in buying the business - or getting them down that road, because the role of private equity is to take a stake and exit at the right time and that is when the management will actually own the company in what is called a tertiary buy-out.
Maybe managements are timid about taking the plunge, not being able to identify the opportunity and not up to speed with the support that is available. "It is quite difficult to find the information and identify who the next management team is," says Williamson. "Sellers are easy to find but we are seeing fewer management teams wanting to structure a deal and buy the company.
"More often we are seeing the seller of the company wanting to sell, hoping to sell to the management provided it can come up with the best price, virtually amounting to an auction.
"At Lloyds TSB Scotland we are busy, it is an exciting and competitive market, we are seeing a lot of deals and we are increasing the number of front-line people we have doing deals in Scotland."
The Bank of Scotland has no doubt about the state of the MBO market in Scotland - it is busy.
The bank's director of integrated finance, Frank Summers, says MBOs are cyclical and because there were many of them around five years ago, the funders are wanting out and the managers are staying in and probably buying more equity.
"This means there is a consistent level of MBOs in Scotland and there is a lot of it in the oil and gas sector," he says. "Investors who have invested over the last five years want to crystallise their value and get out and this creates secondary or tertiary buy-outs. If management have bought and built the business, they are happy to go again."
