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There's no guarantee for private equity sales; During Active's tenure of Evans Cycles, sales rose by 300 per cent as 25 new outlets were added, a performance which attracted the attention of Halfords and Sports Direct, but ultimately, at least three other private equity firms were involved in the jostle to buy Evans before ECI Partners stumped up the PS100 million Active were seeking.

Byline: Peter Sharkey Special Correspondent

THE last great bull market for private equity houses arrived unannounced at the beginning of the century and lasted until the great financial crisis almost swallowed the banks that had been so willing to extend the credit which fuelled many high-profile acquisitions.

According to Dealogic, the global value of private equity buyouts valued at more than $1 billion grew from $28 billion in 2000 to $502 billion in 2006; on the eve of the crisis, ie, the first six months of 2007, the figure reached $501 billion.

Private equity firms' reputation for dramatically increasing the value of their investments undoubtedly helped fuel this phenomenal growth.

Their ability to achieve high returns was attributed to several factors: extremely lucrative incentives (and incredibly long hours) both for private equity portfolio managers and those running the newly-acquired business; an aggressive use of debt, which not only provided financing, but a host of tax advantages and an almost obsessive focus on cash flow and margin improvement.

However, as the Harvard Business Review pointed out just as the private equity bull market run was petering out, the "fundamental reason behind private equity's growth and high rates of return is something that has received little attention, perhaps because it's so obvious: the firms' standard practice of buying businesses and then, after steering them through a transition of rapid performance improvement, selling them. That strategy, which embodies a combination of business and investment-portfolio management, is at the core of private equity's success."

Planning an exit sale prior to acquisition makes enormous commercial sense. By late 2007, the average period a private equity house held onto a newly-acquired company was four years, but as the financial crisis took root and spread, the previously well-oiled exit routes began closing.

Depressed equity markets made IPOs either unviable or impossible, while the sudden lack of companies with an appetite for acquisitions dampened the likelihood of a trade sale. This left secondary buyouts as one possible option, but as the supply of debt dried up, this avenue too was closed.

As a consequence, many private equity firms held onto companies for significantly longer than originally planned - six years was the average in 2013 - but that timespan had fallen to 5.5 years by mid-2015.

But has the pendulum swung back entirely in private equity's favour? On the one hand, the evidence suggests it has. Company balance sheets are awash with cash and many are taking advantage of record low interest rates to grow via acquisition; liquidity conditions too are favourable, while rising corporate valuations offer ideal conditions for private equity houses wishing to divest themselves of investments they would have preferred to sell much sooner. According to data published by Thomson Reuters, the value of private equity-related exit transactions increased by 25 percent in the first nine months of 2015 compared to the same period in 2014.

A buoyant M&A market, coupled with equity markets which, despite periods of unwelcome volatility, remain open for new listings, have left private equity firms with an abundance of options when they consider exit scenarios for their portfolio businesses.

Topping the list of preferred options is the trade sale, the conditions for which have been ideal for some time, driven as they are by a combination of low borrowing costs and a ravenous corporate appetite for rapid, inorganic growth. A trade sale is viewed as the perfect alternative for private equity firms, primarily because acquirers invariably understand (or they believe they do) how they can achieve operational synergies once they've bought their target company, which means they tend to pay 'top dollar' for them.

However, demand for attractivelooking corporates has resulted in the return of one feature absent from the M & A landscape for a number of years: the auction.

The sale earlier this year of retailer Evans Cycles, bought in 2008 by Active Private Equity for PS35 million, offers a fine example of how the auction process attracts bidders and enhances valuations. During Active's tenure, sales rose by 300 per cent as 25 new outlets were added, a performance which attracted the attention of Halfords and Sports Direct, but ultimately, at least three other private equity firms were involved in the jostle to buy Evans before ECI Partners stumped up the PS100 million Active were seeking.

Yet the sale of investments by private equity firms is still far from a one-way bet.

For instance, secondary buyouts, popular between 2010-13 when M & A markets were depressed and buyers scarce, have fallen out of fashion; in the USA, the volume of secondary buyout deals completed so far this year has dropped by a third.

America's IPO market provides further recent evidence which suggests that private equity houses must continue to work hard at selling their investments.

In the summer, KKR, often referred to as 'private equity royalty', began preparing its payment processing provider, First Data, for a stock market float. Some reports confidently predicted an opening share price that would value the company at more than $4 billion, but the forecasted price began to retreat; by August, KKR suggested a target price of $19 a share was achievable, although First Data eventually went to market in October priced at $16 and was still snubbed by investors.

This episode was a factor in the private equity owners of upmarket department store, Neiman Marcus, which had originally been filed for an August listing, to delay the IPO until 'early 2016' when market conditions are, the owners hope, forecast to improve.

Clearly, markets are less clogged than they were five years ago, but we're still far from the days of 2004-07 when almost anything put up for sale by private equity firms sold almost immediately.

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Evans Cycles is a fine example of how the auction process attracts bidders and enhances valuations
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Title Annotation:Features
Publication:The Birmingham Post (England)
Date:Dec 10, 2015
Words:969
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