UK deal activity bounce-back may be short-lived – report

UK private debt deal volume rose by 48% in the final quarter of 2016 as sponsors took advantage of the high levels of liquidity available, but it may be a temporary phenomenon warns Deloitte.

After a year of private debt deal flow activity across the UK slowing down amid macroeconomic uncertainty, the fourth quarter saw a bounce-back in the number of transactions completed. This was fuelled by private equity sponsors opting to refinance existing debts, according to the latest Deloitte Alternative Lender Tracker report.

In total, 267 deals were completed across Europe in 2016 – up 2 percent from the previous year. The UK recorded a 13 percent drop in the same period as M&A activity decreased by a quarter because of uncertainty before and after the Brexit vote. Europe, however, recorded a 12 percent increase and accounted for 171 deals tracked by Deloitte, up from 153 in 2015.

A quarter of the total European deals completed by direct lending funds did not involve a sponsor.

The increase in UK deal flow in the fourth quarter may only be short-lived, write Deloitte, as the majority were refinancings or dividend recaps as opposed to LBOs or M&A bolt-ons. “This would indicate that the bounce-back may only be temporary and driven by private equity sponsors taking advantage of the strong liquidity in the debt market.”

Senior structured loans were the most popular product in the European market (41 percent) followed by unitranche (35%), while the opposite was the case in the UK where unitranche structures accounted for half of all deals and senior loans a third.

Looking forward, Deloitte expects funds to increase in size and target lower leverage levels and lower margins, aiming for around E+500 bps and placing them firmly in the territory of the banks. “Where speed and response and large hold levels are important, funds may themselves look to underwrite deals in the €200 – €400 million range at pricing levels historically only seen in bank-driven transactions,” the report said.

Furthermore, consolidation within the market is expected to continue at a strong pace “driven by the natural advantages of scale in a gradually maturing market”. The report cited Canadian investor British Columbia Investment Management’s acquisition of a majority stake in Hayfin, completed at the beginning of this year, as one example of this trend.