Seconds out, for 2005's big buyouts.
Secondary buyouts will continue to drive Midlands' corporate deal-making activity in 2005, according to a leading corporate financier.
Mike Higgins, partner at Birmingham-based niche corporate finance boutique Fusion, says that most private equity funders will continue to buy and sell to each other in the next 12 months, relying on these secondary deals to meet their investment targets, rather than funding untested management teams.
'Where once venture capitalists regarded the opportunity to back a secondary buyout with suspicion, they have now come to realise that if the first equity funder was prepared to invest and to back the management team, this probably represents a safe opportunity for the next round of investors,' said Mr Higgins.
'Of course, they need to ensure that there are still good prospects for growth in the business and therefore good returns to be made on their investment and they will undertake rigorous due diligence.
'But the fact remains, that if a business and management team has passed one set of checks, the chances are very high that they will also meet the criteria for further funding, and that the risks for the new funder will be consequently lower.'
Secondary management buyouts started to dominate the market in 2004, accounting for more than pounds 7 billion or one third of the total value of deals done, and Mr Higgins expects this volume to increase in 2005.
'Overall in 2004, the numbers of secondary buyouts increased markedly, although the total number of MBOs completed fell by about five per cent,' he noted.
'Secondary MBO marketdominance will continue for the next few years, as we are still some time away from reaching its peak.'
According to Mr Higgins, market difficulties caused by economic uncertainty over the past few years meant that there have been many more investments than exits made by venture capitalists, since the boom years of 1999 to 2000, causing a backlog in exits.
'Unable to sell for the right return, venture capitalists have been forced to sit on investments for longer than they would like, pushing the average life of a VC investment portfolio to between five and seven years, whereas ideally they would prefer between three and five years,' said Mr Higgins, a former venture capitalist with 3i.
'Venture capitalists have come to realise that the secondary buyout is one of the best ways of exiting an investment and indeed in reinvesting capital.'
He suggests the current practice of funders involving external management to add value to existing management will probably have the effect of reviving a type of transaction which has in recent times been out of favour - the management buy-in.
He said: '2005 will most likely bring an increasing number of management buyins as we see the start of a new cycle.
'MBIs last reached a peak five years ago.
However, funders backed many people, who rather than adding value to the acquired businesses were effectively only buying themselves a job.
'As a result, many MBIs failed and the market lost confidence in the product.
'Now lessons have been learnt and funders understand the ingredients for a successful MBI, a successful management team which has real experience of making other businesses work and which can add real value to the target company.'