Buyout market slumps as debt dries up

THE MARKET for management buyouts has collapsed in the final three months of the year as venture capitalists have struggled to raise debt to help fund their deals. The slump means large venture capital groups will have to downgrade the returns they have projected on their funds.

Figures published today by KPMG, the accountancy firm, show that 27 buyouts worth more than pounds 10m have been completed since the end of September, with a combined value of pounds 1.4bn.

This is half the value of the deals done in the final quarter of last year, and 60 per cent less than in the third quarter, when buyouts worth pounds 3.4bn were backed.

The slump reflects the upheaval in the financial markets, which has hit demand for the high-yield bonds used by venture capitalists to finance their larger deals. Fears of a recession in the UK have also prompted a more cautious approach.

According to KPMG, it could take until the middle of next year before confidence returns. Mike Stevens, the firm's head of management buyout services, said: "Larger, more heavily leveraged deals and those involving businesses in vulnerable sectors such as retailing or exporting have been particularly difficult to finance. It may be some time before the market starts accelerating again."

During the final quarter, the average size of buyouts has fallen to pounds 52m from pounds 85m in the previous three months. This reflects the lack of large buyouts which have dominated the venture capital industry in the past year.

Despite the downturn, 1998 has still been a record year. A total of pounds 11.81bn has been spent on buyouts in the past 12 months, an increase of almost 45 per cent from the previous record of pounds 8.2bn, set in 1997.

Nevertheless, the situation has put pressure on large venture capital groups, most of which have raised huge fundsto pursue large deals.

"For the time being the money is stuck on deposit, earning ever-declining rates of interest," said Mr Stevens. "Either the big private equity houses must wait for the banks to re-enter the market or they must accept deals which involve a relatively high component of equity and less gearing. Either way, the returns they have projected over the next two or three years will have to be revisited."

In the past three months the largest deal was Charterhouse Development Capital's acquisition of Madame Tussaud's from Pearson, the media group, for pounds 435m. The deal was unusual because Charterhouse used a large chunk of its own equity to fund. The venture capital group plans to refinance the business when the debt markets improve.