Private equity firms with holdings in some of Britain's best-known businesses are set to make more money this year than ever before by selling their stakes.
According to research from the Centre for Management Buyout Research (CMBOR), private equity firms have in the first three months of this year already cashed in £9bn of investments. This figure rises to more than £12bn when last month's Debenhams and General Healthcare deals are added in, and compares with the £40bn buyout firms netted from exits for the whole of 2005.
Mark Pacitti, corporate finance partner at Deloitte, the business advisers, said: "Overall, private equity exits have been healthy in 2006 and should be on track to beat 2005, which was itself an all0time record year."
The study from CMBOR, a collaboration between Barclays Private Equity and the accountancy firm Deloitte, highlighted the growing popularity of refinancing as a means for private equity houses to cash in on their investments.
Traditionally, buy-out houses have taken money out of businesses by either floating them on the stock market, or selling them to another industry player or fellow private equity firm. Refinancing allows them to keep control of the asset but also to realise some of the value of their equity by piling extra debt on to a business. CMBOR found that refinancing levels have soared fivefold over the past two years and hit a record £19bn in 2005, leaving it to account for nearly half of all cash realised.
Private equity firms can refinance a business they own by getting it to borrow more money and then paying themselves special dividends from the cash raised. Another popular method sees private equity-owned businesses sell their property assets to a third party, such as an insurance company, and then lease them back. The lump sum raised can then be transferred to private equity owners.
Debenhams, which re-floated last week, was subjected to every known private equity tactic. CVC, Texas Pacific and Merrill Lynch bought the retailer three years ago for £1.7bn plus £100m debt.
During their ownership of the retailer, the trio paid themselves £1.3bn in dividends after two major refinancings and unlocked £430m of equity from a sale and leaseback. Following the Debenhams float, CVC, Texas Pacific and Merrill Lynch retained control of just under 40 per cent of the company, a stake worth about £600m.
At the end of last month, BC Partners sold General Healthcare, one of the UK's biggest private hospital operators, to a consortium led by Apax Partners for £2.2bn. It had bought the business for £1.2bn in 2000.