According to mid-market advisory firm DC Advisory, there were 113 mid-market deals in the UK in 2016. There were 116 in France, 42 in Spain and 81 in Germany and Switzerland. A closer analysis of UK activity reveals the banks and funds all seemingly targeting the same type of customer in that market.
Around 39% of the UK deals that HSBC lent to were leveraged buyouts with an ebitda smaller than £25 million and 26.7% were refinancings to firms of a similar size. That means that 65.7% of the bank’s lending in the mid-market was to small firms. For RBS, the focus is even greater: 43.9% of its lending was to small LBOs and 31.7% to small refinancings – 75.6% of the total.
Just 10.7% of HSBC’s lending was to LBOs with an ebitda greater than £25 million and just 2.4% of RBS money went to this sector. At Lloyds, a full one-third of business was lending to LBOs smaller than £25 million.
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At the funds, business is again focused on smaller LBOs with only Ares and Goldman Sachs Asset Management writing any business for deals larger than £25 million. Nearly half of Ares’ activity is in smaller LBOs (46%) with another 46% evenly split between larger and smaller refinancings. Alcentra has 66.6% in smaller LBOs and again an even split of 16.6% apiece for smaller and larger refinancings.
Barings has a full 80% of business in smaller LBOs and 20% in larger refinancings. M&G’s business was tilted in the other direction, with a third in smaller LBOs and two thirds in larger refinancing, while ICG wrote 100% of business in this sector for large refinancings. The data shows that both banks and funds seem to focus the majority of their efforts on smaller-scale LBOs. This is for a number of reasons, not least that fees are higher for LBO business than for a straight refinancing and there is a far greater number of smaller LBOs rather than larger LBO transactions to compete for. It is no surprise to see M&G buck the trend and write more refinancing business than LBO business; this is most likely due to the tie up it has with RBS that gives the asset manager exclusive access to SME business clients.
There were six UK LBOs with ebitda of greater than £25 million in the first quarter of 2016: Photobox, Audley Travel, Euro Garages, Element Materials Technology, Kurt Geiger and LGC. Three took place in the second quarter: Mayborn, Argus Media and Openbet. Morrison Utility Services LBOed in the third quarter and there were no LBOs with editda greater than £25 million in the fourth.
Only two funds participated in this part of the market in the first three month of 2016. They were Goldman Sachs, which was involved with Bridgepoint’s buyout of Element Materials Technology, and AimCo, which was in 3i’s purchase of Audley Travel. In the second quarter, Ares was involved in NYX Gaming’s buyout of Openbet. No funds were involved in the Morrison Utility Services deal in the third.
This is the part of the market in which the funds are poised to make more headway. And there are signs of non-banks breaking through. In France, four funds were involved in Apax Partners’ merger of UK crisp maker Kolak Snack Foods with Europe Snacks in the last quarter of 2016 – Tikehau, Cerea, CMC-CIC Private Debt and Unigrains (along with five bank lenders).
The market can expect to see more such groups of funds on larger LBO deals in future.
