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28 February 2008

Buy & Build activity reached record levels in 2007 – It will be tougher in 2008.

A buoyant M&A market and plentiful debt allowed Private Equity-backed companies to make a record number of follow-on acquisitions in 2007 – this will be hard to repeat in 2008.

A ten year study on the buy and build strategies of private equity owned portfolio companies in Europe, released today by Silverfleet Capital, the mid-market private equity firm, in conjunction with Mergermarket, has found that 2007 saw a record number of 385 follow-on acquisitions (“Builds”) by private equity-backed businesses (“Buys”). The 385 transactions represent more than a 10-fold increase on the number completed in 2000. Two high profile examples are the restaurant group Tragus that acquired Ma Patter’s and Strada and leisure group Merlin Entertainment that in 2007 bought Madame Tussauds to add to its Gardaland, Aquatica and Legoland acquisitions.

Commenting Neil MacDougall, Managing Partner of Silverfleet Capital said: “We have seen the continued growth of buy & build strategies in recent years, with 2007 representing a peak in both the volume and speed of follow-on investments by private equity-backed portfolio companies. Undoubtedly some of this simply reflects the strong M&A market in the first half of last year, but given the current debt market conditions, we predict that 2008 will be the year of focus on portfolio companies generally.”

“If private equity firms are to continue to achieve their target returns in turbulent times they will need to concentrate on creating value within their portfolio companies by using their expertise to manage and grow those businesses. One of the key ways to do this is via a buy and build strategy.”

“Historically many follow-on deals were funded with debt so the current turmoil in the debt market will make the pursuit of buy and build transactions harder. Portfolio companies that are not over-leveraged and have a small and supportive bank syndicate may still have capacity to pursue an acquisition strategy. However, newer portfolio businesses with higher leverage, or older deals that were refinanced to repay their shareholders, may not be able to use debt to fund buy and build transactions. Clearly private equity houses may choose to fund follow-on deals with equity but for businesses with less debt capacity they may have to be more creative and work with trade buyers by merging businesses or forming joint ventures as a means to create value.”