Total funds raised by new issues, excluding demutualisations, fell from pounds 10bn in 1996 to pounds 3.5bn in 1997, according to KPMG Corporate Finance.
But a survey by the Centre for Management Buy-Out Research (CMBOR) shows that pounds 10.4bn was spent on buy-outs and buy-ins in 1997 - a pounds 2.6bn increase on the previous year. The figure could grow higher still, depending on how quickly CinVen completes the pounds 900m buy-out of IPC Magazines from Reed Elsevier.
KPMG blamed the sharp fall in new issue finance on institutions investing more of their funds in large liquid stocks such as banks and pharmaceutical companies, the underperformance of the FTSE smaller companies index and problems with the Alternative Investment Market.
Neil Austin, head of new issues at KPMG, warned that if the trend continued smaller companies wanting to float could find themselves starved of equity funding.
Including the Norwich Union flotation, which raised pounds 3bn of new money this year, the total value of new issues was pounds 6.6bn. This compared with pounds 10.14bn in the previous year but the 1996 figure was distorted by the flotations of Railtrack and British Energy, which raised pounds 3.2bn.
The survey by CMBOR, which is based at Nottingham University and sponsored by Deloitte & Touche and BZW, showed that the buy-out surge was driven by a few mega-deals such as Nomura's pounds 900m purchase of the William Hill betting chain. While the amount spent on buy-outs rose by 33 per cent, the number of transactions rose by only 3 per cent
Tom Lamb of BZW Private Equity cautioned that while the UK buy-out market was entering 1998 in an incredibly buoyant state, there were growing worries that the next transaction might prove a "deal too far".
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