Ingredients to Securing the Ideal Investment; Whilst the UK Private Equity Buyout Market Showed Resilience in the First Half of 2012, the West Midlands Did Not Perform Quite as Well. but the Deal Pipeline Remains Promising - So What Conditions Are Needed to Convert Those Deals, Asks Paul Harper, Investment Director at the Birmingham Office of Equistone Partners Europe

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Byline: Paul Harper

Latest figures from the Centre for Management Buyout Research (CMBOR), sponsored by Equistone Partners Europe and Ernst & Young, reveal something of a mixed picture although the overall trend is good. The value of private equity backed buyouts in the first half of 2012, totalled pounds 8.0 billion representing a 38 per cent increase on the second half of 2011 (pounds 5.8 billion).

In the West Midlands, the figures are less encouraging showing that the number of deals involving businesses headquartered in the region totalled five - just half the number completed in the second half of 2011 - with a value of pounds 165 milllion. The ten deals in the second half of 2011 had a value of pounds 238 million.

A more detailed analysis of the figures reveal that confidence is fragile, particularly for larger deals, but encouragingly investment opportunities are out there. The deal pipeline both for us - and indeed many others - continues to be good. The challenge is maintaining momentum within a deal process and ensuring all parties have the dogged determination needed to drive a transaction to fruition.

Undertaking a management buy-out, or indeed any change of ownership in a business, has never been straightforward.

In the "heady days" of 2006 and 2007 businesses changed hands for high prices often within tightly controlled processes driving very tight timeframes.

The reality is that these transactions were the anomaly and to a certain extent the deal market has returned to first principles in recent years. Making successful investments was never, and should not be easy. In the current economic environment however, the challenges are without doubt even greater. There are three essential ingredients to delivering a successful private equity investment no matter the wider market conditions: stability, visibility and ability - not just the ability of the management team to drive growth but the ability to ultimately exit the investment after, a period of, say, three to five years.

Let's first look at stability, the holy grail of governments throughout the world.

No economics PHD is required to know that the current economic environment is far from certain and that any semblance of stability is some way off. Concerns over the future of the Euro are just one aspect. Consumers throughout the developed world, once an engine of prosperity, remain fragile and the media remains full of warnings (and statistics!) that the European debt crisis is not only slowing Europe's recovery but that of the other major economies.

Add to this worldwide political uncertainty and the worst weather in the UK since records began (isn't this always the case?!), and one's quest for stability seems flawed.

However, if you look hard enough, positive "green shoots" can be found and underlying progress is being made. More optimistic news has recently emerged - last month UK retail sales rose by 1.4 per cent, the number of people in work saw its biggest increase since the quarter to August 2010 and, as expected, inflation has begun to fall, currently standing at 2.8 per cent. In addition, the UK government has taken further steps to underpin the UK economy announcing new capital for banks to lend direct to business alongside moves to reduce the reserves required by our largest banks (again encouraging them to lend).

Also important to remember is that private equity invests in individual businesses, not economies. Since time began, strong management teams with a sound business model have delivered growth irrespective of the prevailing economy at the time.

The second issue is that of visibility. We are bombarded with economic predictions on a daily, almost hourly, basis as people strive to predict the future. But whilst many such predictions are driven by an attempt to grab a headline, they can be unhelpful for business (and are inevitably wrong! …