Exit strategies underline attractiveness of Irish market

The realisation by private equity firms of their investments in Irish companies has been a notable feature of 2004, write David Byers and Ben Gaffikin

This may not have been a remarkable year for private equity investment in Irish companies, but the quick turnaround of investments and the substantial capital profits made emphasise that Ireland remains an attractive environment for private equity.

Even while approaching a possible investment, a private equity fund will be "checking the exits". In deciding whether or not to commit to the deal, the manager of the investing fund will want to see a clear route to realisation. Pension funds, insurance companies and other investors who provide the money to private equity funds expect to achieve a return between three and seven years after their original investment.

The principal exits in the Irish market in 2004 were achieved in two to five years. It took just two years for Merrill Lynch to realise its interest in Rodinheights, the Green Property buyout vehicle, and for Investcorp to cash out of Spectel.

Trade sales and flotations have traditionally been the main exit routes for private equity investors. Obviously, the popularity of flotation as an exit varies in line with capital market conditions.

In a positive development, IPOs returned to the Irish market in 2004 for the first time since 2000. C&C and Eircom took advantage of improved conditions to access the capital markets efficiently in institutional-only offers with accelerated timetables. Private equity firms BC Partners and Providence Equity Partners/Soros Private Equity Partners reduced their stakes in C&C and Eircom, respectively, on flotation. Providence and Soros later sold most of their remaining Eircom stakes in secondary placings in October and December.

Trade sales are less subject to the vagaries of the capital markets and, generally, allow the private equity investor an immediate and complete exit.

In April, IT firm Eontec was acquired by Siebel Systems in a $130 million (€97.1 million) deal. Spectel, the manufacturer of voice and data conferencing products which cancelled an IPO in 2002, was acquired in October in a trade sale by Avaya, the US-based communications software provider, in a deal which valued the company at approximately €86 million.

Trade sale and flotation are not the only exit routes. In a deal with the other shareholders, Merrill Lynch sold out of Rodinheights, which is now owned by Stephen Vernon, other members of management and Bank of Scotland.

In a new twist, the Irish market saw its first secondary buyout, or "buyout of a buyout", in 2004. Candover, which with management had taken Clondalkin Group private in 1999, sold its stake to private equity firm Warburg Pincus in January in a deal which valued the company at €630 million. Clondalkin senior management remained involved.

In a cyclical industry with an increasing focus on early exit, secondary buyouts have become more attractive. They can reconcile the competing imperatives (on the buy-side) of funds with private equity money to invest and (on the sale side) of fund managers focused on exit.

This is not to say that private equity firms focus on capital-realising exits to the exclusion of income flow during the life of their investments.

Financing structures may allow for cash distributions. Eircom paid a €400 million dividend to its shareholders in 2003. Assets may be realised to pay down debt and for return to shareholders. Green Property, taken private for €1 billion in 2002 (€1.8 billion with assumed debt), is reported to have realised about €1.5 billion in property sales and to hold approximately €1 billion in assets on its balance sheet.

The take-private transactions which constituted a significant part of Irish corporate activity in 2002 and 2003 have slowed.

Looking ahead, we should expect to see activity as private equity investors in companies taken private in the past couple of years, such as Benchmark Capital in Alphyra and Alchemy in Riverdeep, seek a return on their investment. First up may be Jefferson Smurfit, taken private by Madison Dearborn and management in 2002, where chief executive Gary McGann has indicated a possible float within 18 months.

David Byers is a partner and member of McCann FitzGerald's corporate finance team and Ben Gaffikin is a solicitor and member of McCann FitzGerald's private equity and venture capital group.