IT HAS been a buoyant year for private equity deals in Scotland. There have been a number of high-profile transactions, demonstrating the ability of Scottish businesses and management teams to attract funds from home-grown, UK and international players. And two new funds raised by Scottish Equity Partners (SEP) and Dunedin Capital Partners confirmed the high regard in which Scottish financial firms are held.
KPMG figures show that the third quarter has been a bumper period for management buyouts (MBOs) in Scotland. The firm's corporate finance unit, which tracks UK buyouts with a value of more than £10 million, puts the total value of deals completed in
Scotland in the third quarter at £135m, up from £40m in the same period a year ago.
Bruce Walker, corporate finance director for KPMG in Scotland, says: "This has been one of the strongest quarters on record, reflecting a great three months for mid-sized firms in particular. We have witnessed eight deals already this year with a total value of £232m, which is a pretty big number for Scotland."
Oil and gas proved to be one of the most buoyant sectors for private equity deals. As the oil price continued its march higher, Aberdeen attracted cash from domestic and international investors.
"We saw the desire of private equity players to make sure they had an oil and gas investment within their portfolios," says Ally Scott, head of Barclay's leveraged finance unit in Scotland.
Major deals included the £14.1m transaction in which Ramco Oil Services was acquired from Ramco by its management team with backing from Edinburgh-based Teasses Capital and Clydesdale.
Because oil prices are forecast to remain high and investment in the sector is likely to be sustained over the next few years, the appetite for oil and gas assets remains undiminished going into 2007.
"There are good-quality businesses out there," says Frank Summers, head of integrated and acquisition finance for Scotland at HBOS. But he cautions that this general move into oil and gas is driving up prices. And he knows of a number of outfits specialising in the oil and gas sector that are hanging off from investing for now because they consider prices too high.
Apart from oil and gas, deals have been fairly evenly spread across a number of sectors.
In retail, a recent major deal was the £45m MBO of clothes chain Internaçionale, which was backed by Glasgow-based venture capitalists Penta Capital and Barclays.
In the financial sector, England-based Gresham Private Equity backed the MBO of Glasgow's Giles Insurance Brokers, which also came in at £45m. Other top deals include Dunedin Capital's £45m sale of the Dalkeith-based diary manufacturer Letts Filofax to London-based Phoenix Private Equity.
Ross Marshall, chief executive of Dunedin Capital, says he sees good prospects for deals in the healthcare, financial services and building and construction industries.
This has also been a glowing year for Scotland's private equity houses. At the start of this month, Scottish Equity Partners announced it had raised a £160m venture capital fund after initially setting out to raise £120m. A few days later, Dunedin announced it had raised a £250m fund to back MBOs, easily exceeding its £200m target.
Although many Scottish private equity firms are doing increasing amounts of business south of the Border and internationally, now is a good time to be dealmaking in Scotland. While London has by far the bigger market, Scotland remains much less competitive and, as yet, no single player has emerged to dominate the market.
But Scottish investors tend to have a UK-wide perspective and this should not be considered a weakness. Penta Capital's director Torquil Macnaughton explains that to pull off an MBO: "You need a recipe of factors to come together at one point in time." These factors include a good management team, a company that is ready to jump to the next stage of its development and the willingness of the existing investor to be ready to exit the business. In a market as small as Scotland's, there can be a long wait between deals for all these factors to line up.
Scotland's market is also characterised by mid-sized deals. To get involved in the mega-deals, and demonstrate they are power players, private equity houses have to look beyond the nation's borders.
For now, the main concern for home-grown players who wish to keep investing in Scotland is to get to know the next generation of business leaders.
Frank Summers at HBOS says: "We have spent a lot of time this year getting to know the management teams." He adds that, as a result, his team have got their collective eye on a number of potential opportunities that are not quite yet on the horizon.
Summers says of 2007: "We are very hopeful it will be better than this year."
