Scots buy-out activity slumps

BUY-OUT activity in Scotland has fallen dramatically this year as economic uncertainty and difficulties accessing capital has put off both private equity and management buyers, according to a survey out today.

Across Scotland, there were only six buy-outs during the first nine months of the year, totalling £48.1 million in value, compared to 14 deals at the same point last year, adding up to £407.6m.

The latest data published by the Centre for Management Buy-out Research, sponsored by Ernst & Young and Barclays Private Equity, shows a decline in activity across the UK, but Scotland has suffered the steepest falls.

Neil Patey, Ernst & Young’s private equity leader in Scotland, said the slow-down in both value and volume reflects a significant weakening in business confidence.

“This drop in confidence coupled with nervousness in the global debt markets has had a significant impact on the ability to fund buy-outs in Scotland,” he said. He added that the banking sector remains nervous about providing debt to fund deals, with some now being funded entirely through equity.

The overall value of UK buy-outs in the first three quarters of the year reached £7.8 billion, lower than at the same point last year, when a resurgent buy-out market totalled £13bn.

While activity throughout that year has been on 2010 levels, the value of buy-outs across the UK in the third quarter reduced markedly, with values slumping to £1.1bn, compared to £3.1bn in the second quarter and £3.6bn in the first three months.

In Scotland, just three deals completed during the last three months, generating £35.6m, although that was up on the previous quarter.

The decline has been particularly steep in the retail sector, with no retailers at all changing hands north of the Border. However, Patey said that with the sector facing a very difficult consumer environment in the run up to Christmas, there was a possibility that the threat of insolvency could boost the numbers through pre-pack and rescue deals.

The research also reveals that smaller deals are proving more popular, with the “lower mid-market” – deals of between £10m and £100m – relatively positive in the context of this year’s overall performance.

In the UK, 60 deals completed in the first three quarters with a value of £2.1bn, compared to 55 deals at the same point last year, worth £1.9bn.

Buy-outs in Scotland have all been below £100m, with three below the £5m mark.

Patey said: “The current trend is for private equity to consider smaller deals because of the lower gearing and lower risk involved in each deal.”

He said competition was intensifying among private equity houses for deals in that value range, as they competed for far fewer quality assets.