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UK private equity firms brace for BGF competition

10 Nov 2011

A significant proportion of UK private equity firms expect to see increased competition from the Business Growth Fund (BGF), the £2.5bn vehicle established to target UK SMEs, in the coming 12 months.

According to research outfit Grant Thornton’s quarterly Private Equity Barometer, 37 per cent of more than 100 UK private equity executives surveyed expect competition from the government-backed venture fund to increase over the course of the next year.

The survey also revealed that even though the majority of UK private equity firms plans to be active outside London in the coming months, most only have offices in London and do not plan to open any regional offices.

“UK private equity firms seriously need to consider how they intend to tackle regional markets if they wish to compete for deals with committed regional players like LDC and the Business Growth Fund. After all, more than half our respondents expect to be active in regions outside of London while very few are prepared to open offices there,” said Mo Merali, head of private equity at Grant Thornton UK.

“Meanwhile, it is no coincidence that LDC, with its strong regional office network, managed to close eight buyouts in the year to date. Moreover, the BGF is in the process of establishing its local presence around the country,” he added.

Merali also said that 73% of our respondents expect to be active in the North of England in the next six months, while two thirds have no plans to run an office in the region. Having people on the ground would dramatically improve their chances of generating proprietary dealflow outside London. Just being in a region means that you pick up local intelligence on interesting companies, he said.

“Scotland can also expect a fair share of commuting private equity professionals – even though half of the respondents to the survey expect to be active there in the next six months, 87% do not have an office in Scotland and do not expect to open one,” he added.

The survey shows that the most coveted sector group for investment will be business support services infrastructure and logistics, where 42 per cent of respondents are expecting to be most active in the next 12 months, followed by industrials, manufacturing and engineering (34 per cent).

But in terms of valuations in the next 12 months, respondents expect the highest EBITDA multiples to be in high technology (8.4) and financial services (8.1). These would affect 29 per cent expect to be most active in high technology, while only 14 per cent expect to be most active in financial services.

“These broad sector preferences certainly tally with our experience in some of the regions we operate in, where a growing range of potential bidders are showing an interest in related subsectors like precision engineering into the defence, nuclear and aerospace industry, the waste and environmental area plus technology,” added Merali.

Last month BGF partnered with the Scottish Investment Bank’s Scottish Venture Fund, to boost availability of equity funding for Scottish businesses. This new partnership will create potential investment opportunities of up to £10m for Scottish businesses.

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