Sharp jump in MBO activity as business owners seek an exit amid tax rise fears

 
  • Strong demand to back deals from private equity firms with record high levels of “dry powder” to deploy
UK management buyout (MBO) activity jumped sharply last year - up 20% to 91 in 2017, up from 76 in 2016.
 
The upswing comes as business owners are increasingly looking to crystallise the value they have built up in their companies via an exit.
 
The total value of MBO deals rose 4% to £2.7 billion in 2017, from £2.6 billion in 2016.
 
The closer than expected General Election in 2017 has also triggered activity with owners looking to de-risk in case a future change in government results in the loss of favourable tax incentives such as Entrepreneurs’ Relief. Whereas political uncertainty has been known to dampen M&A activity in the past, in the current climate the reverse appears to be true.
 
Businesses are also finding that MBOs are increasingly easy to fund as private equity firms are under pressure to deploy their excess capital. Globally, uninvested capital hit a record high of $1.7 trillion in December 2017, according to Bain & Co.
 
MBOs of technology companies accounted for the biggest proportion of the total – 20% of last year’s total (18 out of 91). Industrials made up 11% (10) and manufacturing 9% (8). Examples of MBOs in the last year include:
 
  • Smoothwall Ltd, a UK-based provider of web filtering technology for the education and public sectors, backed by Tenzing Private Equity last October.
  • Optilan UK Ltd, a designer and engineer of telecommunications and security systems integration projects. The deal was backed by NVM Private Equity Limited last April.
  • Clearly Drinks Group, a manufacturer of bottled soft drinks, whose MBO was backed by NorthEdge Capital in April 2017.
  • Cotswold Collections Limited, a women’s clothing retailer, backed by Rockpool Investments LLP in June.
Ish Alg, corporate finance Associate Director, says: “Many businesses owners are viewing now as the right time to exit, with MBOs remaining an attractive option for owners whilst also incentivising management.
 
“In previous years vendors have delayed making decisions around exits, mainly due to valuation concerns caused by on-going uncertainty in the broader economic and political environment. Whilst uncertainty does remain, encouraging UK growth stats and a clear deadline for Brexit has helped to calm fears and has undoubtedly contributed to increased valuations.
 
“In addition, the availability of both debt and equity finance, coupled with strong private equity appetite for deals, means that transactions are completing at attractive valuations. With PE firms sitting on record amounts of ‘dry powder’, conditions for deal-making are ripe allowing them to invest and back management teams capable of delivering growth”.
 
Sharp jump in MBO activity in the past year – up 20% to 91 in 2017
 

 
To discuss any of the issues raised in this article, please contact Ish Alg.
 

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