The private equity industry in the West Midlands will have to prepare itself for more and more auctions, law firm Eversheds has warned.
Indeed auctions have become the norm for the sector and will drive it in 2005, despite the distaste that many PE firms have for the process.
The prediction follows on the latest research that shows that private equity, particularly secondary buyouts, continues to drive M&A activity in the upper midmarket sector - £50 million to £250 million.
Keri Rees, corporate partner at Eversheds' Birmingham office, said: "Historically, private equity houses have tried to avoid auctions like the plague. During the process they have to spend ages trying to understand the business in order to make an informed bid, only to find that they have been trumped by another bidder.
"PE houses prefer to build up a proprietary relationship with a potential target and set up a deal. In previous years, deals have simply taken place on the basis of that relationship.
" Now, when targets are approached, their advisers immediately and quite rightly tell them to market-test the price levels. That means an auction, and another nail in the coffin of proprietary deal flow."
The continuing activity in the West Midlands upper mid-market has come about as a result of an increased willingness on the part of PE houses to "play the game" and it results in those houses inevitably paying fuller prices in auctions. But for this activity to continue, sellers and their advisers will have to be a bit smarter in how they manage the auction process, it is suggested.
Ms Rees said: "Some advisers still insist on inviting 20 or more houses to bid during the auction process. This results in few private equity firms taking the initial round seriously, so they bid almost any price just to get through to the second round and get access to management."