Despite a dismal third-quarter M&A tally, an upturn in bank funding is fuelling a mood of optimism
The historic facts for deal-makers in the insurance sector make grim reading in the third quarter of 2009. They show deal-making activity at the lowest level since 2002.
As usual, the charts, produced by Corpfin, are divided into transactions valued at above and below £40m. In each case they only include deals completed in the period, where the amount paid has been publicly disclosed and the buyer or seller operates in the UK.
There was just one smaller deal (valued at just below £40m) in the period, compared with an average of around eight per quarter over the 10 years recorded. Even allowing for the fact that we are looking at the traditionally quieter summer months, this is a very slow deal rate.
After two quarters in which no larger deals were seen at all, there is some encouragement in the form of two completed at the close of the third quarter of the year. That said, the numbers and values are still near the lowest level – and far below the quarterly average – seen for the 10 years preceding the start of the current recession. So deal-makers cannot take too much heart from this.
Nevertheless, the chatter around the market since the end of the summer holidays is that deal-making is picking up. Is this for real, or is it just that market participants are talking things up?
If there is a new dawn, it has certainly only been breaking since the summer, so it is perhaps helpful to focus on that period of just a few weeks. A comment made by one banker, the head of a division that provides debt to buy-outs across all sectors, is helpful in this respect. He said his team, which normally backs around 15 new deals every six months, had done so in only one case in the second half of 2008 and another in the first half of 2009.
When we spoke to him in mid-September, however, the team was already up to three deals – all completed since he returned from holiday.
More important, he thought that the pipeline of new deals was looking likely to put his team back at its normal 15 figure for the second half of 2009.
That is a picture of a step change – down and up again – and a clear view that a deal-makers’ dawn is breaking. At Corbett Keeling, we are certainly seeing more new deal activity at the moment than at any time in the past 12 months.
A key element of deal-making – and one of the factors that has caused a slowdown since the second half of 2008 – is the supply of bank funding (or lack of it) for management buy-outs.
One of the results of debt drying up is an increased number of buy-outs funded with private equity only, without any support from banks.
Perhaps the banker’s view of an increase in deals is reflected in statistics, produced by Unquote, recording the ratio of all equity-funded buy-outs to all buy-outs.
This showed a sharp drop from 50% in the second quarter 2009 to 30% in the third quarter, demonstrating that equity providers are no longer being left to carry the day alone but are now getting significantly more support from the banks that provide debt.
Unquote also carries out a quarterly survey of future expectations in relation to buy-outs. In the third quarter, this showed some optimism:
• 46% of respondents thought that larger buy-out activity was on the increase, compared with just 21% in the preceding quarter;
• the corresponding figures for smaller buy-outs was a rise to 82%, from 75%; and
• there was more optimism this quarter than last that prices being paid for businesses had fallen far enough to reflect economic conditions – and therefore trigger deal activity.
So, notwithstanding record-breaking low deal activity in the insurance sector, there is some optimism across the broader economy – and perhaps with good reason.
It will be interesting to see what the fourth quarter brings! IT
Jim Keeling is joint chairman of Corbett Keeling, which advises on funding buy-outs and selling insurance businesses