Private equity investment slumped last year, but the sector remains upbeat. Alistair Houghton reports

There’s no question that the private equity sector took a massive hit in the recession – but those in the sector insist investment levels will soon start rising again.

Research from the Centre for Management Buyout Research (CMBOR) this week showed that the total value of private equity-backed buy-outs in the North-West fell from £1.87bn in 2008 to £432m in 2009. The number of buy-outs stood at the lowest level since 1989, with just 54 deals completed in the region.

The CMBOR report, sponsored by Barclays Private Equity, showed there were few signs of a recovery at the end of last year. In the fourth quarter of 2009, the North-West recorded just 14 deals with a total value of £16.7m – the lowest quarterly total in the region since 1988.

But there are signs that the market is returning to life.

Last month’s £955m sale of Cheshire-based retailer Pets at Home, by private equity group Bridgepoint to fellow private equity firm Kohlberg Kravis Roberts (KKR), is one of a recent small flurry of recent deals involving private equity backed companies. Also in January, survival equipment maker Survitec was the subject of a £280m buy-out deal by private equity firm Warburg Pincus. The company owns Birkenhead firm RFD Beaufort, which employs more than 150 people.

The spate of deals is being seen by many observers as signs of a return to life of a form of business investment that was in the doldrums for the best part of two years.

But will things ever return to how they were before the credit crunch? A few years ago, in the good times, private equity deals were backed by banks prepared to lend from their abundant supplies of cash. Not all investments paid off. Knowsley-based Ethel Austin, for example, was backed by Lloyds Development Capital and ABN Amro before it eventually collapsed into administration.

But returns can be high. Just this weekend, the Sunday Times published its Buyout Track 100 list of the country’s fastest-growing private equity-backed firms. Warrington payroll services provider Parasol was the top-ranked north-west firm. In the two years to April, 2009, it saw profits rise 87% to £3.6m.

Other Merseyside and Cheshire firms listed included Protocol Skills, of Ellesmere Port. The company, which is 75%-owned by Close Brothers Private Equity (CBPE) Capital, saw profit rise 69% in the two years to June, 2008.

Leading advisers say that there is now more behind-the-scenes activity among company owners looking to attract private equity investment. The question now is when talks will translate into deals.

John Walker, director at Barclays Private Equity in the North, said: “As seen across the UK, the end of the decade saw very low levels of buy-out activity in the North-West, with a recovery failing to materialise, particularly in the mid-market. “However, while the north-west deals market faced a number of challenges in 2009, and the fourth quarter represented a low for the region, it is clear that a number of deals were in progress during the period. “Indeed, the first quarter of 2010 has already seen significant deal activity – including KKR’s buy-out of Pets At Home, and Warburg Pincus’s £280m buy-out of Survitec Group. “The strong start to the year is extremely positive for the North-West. Maintaining that momentum during an election year will be the main challenge for the region’s private equity houses, banks and advisers.”

James Dow, founding partner of Warrington corporate financiers Dow Schofield Watts, agrees that private equity firms are now hunting investments again, but expects it will be some months before deals materialise.

He said: “I would say we probably bottomed out in October or November last year in terms of private equity activity levels.

“Since then, we’ve seen a strengthening in the number of people evaluating opportunities. There is increasing dialogue with shareholders on the possibility of takeovers. “That has not yet converted into a significant flow of deals, but I’d probably expect that to be at the back end of the year. “The caveat is really going to be the availability of debt finance rather than equity finance.

“That’s one stumbling block. Another is the confidence of private equity investors and their willingness to part with their cash, particularly when we’ve got the possibility of a double-dip recession.” Mr Dow said that the private equity market had been in the doldrums since late 2007. The 2008 figures were inflated as many business owners rushed to sell their investments before capital gains tax rose.

Another firm listed in the Buyout Track 100 league table was Knowsley metal testing specialist Stewart Group, which saw profits rise 43% to £4.9m in the two years to December, 2008. The company, formerly known as the Alex Stewart Group, was bought in 2006 by a management team led by John Notman-Watt. That deal was backed by CBPE Capital, which owns 42% of the business.

Mr Notman-Watt, who had spent many years in the metals testing business, had been looking for an existing testing company he could take over and expand. He chose Stewart Group because of its potential for growth, and in an interview with LDP Business last year he said investors were “queuing up” to back his plans – a sign, perhaps, of the strength of the private equity market in those heady days.

Stewart Group has offices and laboratories all over the world, from Argentina to Zimbabwe. Mr Notman-Watt said he chose CBPE as his investor because of its international expertise. Yesterday, Mr Notman-Watt said he was pleased Stewart Group had been recognised as one of the country’s fastest-growing private equity-backed firms.

He said: “This is a recognition of all of the hard work, innovation and dedication of our employees. “Stewart Group is in a strong position to expand and diversify throughout 2010 and beyond.” “It is increasingly important to broaden our service offering and adapt to changing markets as the search for new mineral deposits intensifies to meet future global demand.”

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