A second bite at the equity market

The statistics appear to back him up. Last year was another good one for the flourishing secondary buy-out market – where one financial institution replaces another.

The Centre for Management Buy Out Research, based in Nottingham, calculated that there were 58 deals completed last year, at a market value of £2.9bn.

Secondaries accounted for nine per cent of the overall private equity market. Among the big deals was the £1.25bn sale of Gala Group to Cinven and Candover.

Gala, which operates bingo halls, is now owned by its third generation of private equity houses. In 1997, it was initially bought from Bass by PPM Ventures for £234m.

Three years after that, it was sold to CFSB for £400m. Exiting for £1.25bn last year shows how profitable secondaries can be. Although slightly down on 2002 (65 deals at £4.5bn and a 10.5% market share), the secondary market is still very much in its infancy in the UK and the potential for growth is significant.

The figures for 2002 were boosted by one acquisition worth £2bn. Just three years ago, total deals were worth £979m and only 31 were carried out, equivalent to just 5% of the market. The trend, despite the odd blip, is up say the experts.

‘If you look back three to five years ago, you will not have seen as many secondaries as you do now,’ says Ware. ‘Businesses realise they can make a good enough return by selling onto another business.’

According to Ware, a flourishing private equity market and a dearth of IPO opportunities, allied to the fact that businesses need liquidity will see secondaries continue to flourish. Added to the fact that there are now ‘more players in the market’, Ware remains optimistic.

Rod Ball at CMBOR agrees. ‘Already there are one or two public to private deals that will go through this year. People are pretty confident about the market,’ he said.

News of the secondary markets comes as many believe that the pressure is mounting on venture capitalists to ‘cystallise’ returns on their investments.

In January the CMBOR produced research which showed that VCs had unrealised investments in the UK totalling £37bn – £11bn of which related to deals done before 2000.

The research shows the average life span of an investment has grown from 3.5 years in the early 1990s to an average of alost six years in 2003.

Experts believe the current difficulties in finding trade buyers and the soft IPO market have increased the backlog of investments awaiting realisation.

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