A quarter-century of MBOs
Mike Wright founding director of the Centre for Management Buyout & Private Equity Research (CMBOR) and professor of financial studies at Nottingham University, has seen many changes during 25 years of research into MBOs. So what now for the buyout world? By Lyndon Driver
The origins of management buyouts (MBOs) can be traced back to the early 1980s when companies had to restructure to survive. In 1986, the Centre for Management Buyout & Private Equity Research (CMBOR) was founded at the University of Nottingham in the UK, to provide objective and comprehensive analysis of this fledgling deal structure. At first, MBOs were rescue deals, but as specialist UK private equity (PE) firms such as 3i, Cinven and Apax came of age, the buyout market became more formalised.
‘Relaxation of the laws on financial assistance meant that lenders could obtain security on the funds they advanced, meaning that PE firms could take equity shareholdings,’ says Wright. ‘In addition, the creation of the UK’s Unlisted Securities Market – roughly in line with the establishment of similar markets across Europe – created opportunities for PE firms to sell their investments. These factors combined to create the PE cycle.’
In the late 1980s, when US banks turned their attention to the UK buyout market, there was the first wave of leveraged deals. Leverage facilitated increasingly larger buyouts and there were two boom periods where LIBOR-based lending exceeded conventional levels, with the consequential problems for PE portfolios. But the emergence of secondary, tertiary and even quaternary buyouts proved a key feature in providing exits for PE houses at opportune times, enabling them to begin fundraising once again. So what does Wright make of the current market conditions?
‘Unfortunately, some deals that were done at the peak of the liquidity boom are struggling to meet their debt obligations, and as a result of this we have seen a spate of debt-for-equity swaps, whereby the banks have taken control of the portfolio companies in an agreement to forfeit repayment of the remaining debt. Having said that, PE-backed businesses are much more likely to be able to refinance their loans, as PE houses – as professional investors – tend to have a better understanding of the issues involved in structuring deals than non-strategic investors.’
To stimulate MBO transaction volumes, buyer-vendor price expectations must be aligned. Wright does not see a quick fix to this particular problem: ‘This will be a slow process, as corporates today have often had large sums wiped off their balance sheets, and in many cases are determined to hold on to their assets.
‘We are beginning to see a recovery in exits – particularly in the form of secondary buyouts – and this in turn will lead to a new wave of fundraising. But going forward it will be challenging, as the buyout industry has taken the biggest hit in its history, and it remains to be seen whether institutions will lower their allocations to the asset class.’
This article first appeared in Corporate Financier, magazine of the
ICAEW Corporate Finance Faculty
, in June 2011.