Surplus of capital to lift market for MBOs

MANAGERS considering a buyout of their business will be able to secure better deals than they could have done two or three years ago because of a 'substantial surplus' of capital, a director of the 3i investment capital group said yesterday, writes Paul Durman.

Hugh Richards, the 3i regional director in charge of its large companies unit, said: 'The market for large management buyouts is an increasingly competitive one. There will be pressure on pricing, on the amount that venture capital companies will have to pay for businesses. Returns will fall because the deals put together on behalf of management will improve.'

MBOs have made large fortunes for many managers. But as well as wanting to make money, 3i believes managers are motivated by the chance to become their own boss.

Mr Richards estimated that the main backers, including 3i, had 'sufficient capital to last for two to three years'. KPMG Corporate Finance, which advises on large buyouts, predicts that the total value of MBO deals will rise modestly this year to pounds 3bn from pounds 2.86bn last year.

Despite the surplus of capital, Mr Richards said he did not expect a return to the 'imprudent behaviour of 1988 and 1989', when several high-profile MBO teams and their financial backers paid too much for businesses, which then ran into trouble.

KPMG predicts there will be about 60 large MBOs this year, with many hoping for a stock market flotation.