Can private equity revive the corporate finance market?
CAN PRIVATE EQUITY REVIVE THE CORPORATE FINANCE MARKET?
Lee Clifford, corporate partner at regional heavyweight law firm Freeth Cartwright, is optimistic.
Without doubt, 2009 has been a torrid year for the corporate finance market. According to figures issued by CMBOR (Centre for Management Buyout Research) the UK buy-out market fell from a record £46.5 billion at the end of 2007 to just £4.4 billion by the end of the third quarter of 2009. Indeed, this year only 280 buy-outs had completed by the end of the third quarter compared to 487 for the same period last year.
Whilst it is easy to paint a doom and gloom picture of the Midlands corporate finance market, those of us who work in this professional sector know that there is still an appetite to invest and that one of the hungriest investors is the private equity house.
In many ways, private equity is proving to be the Tarzan of the recession, hauling businesses back from the brink and breathing life into those that appear to have given up. The PE houses have the cash and the experience to branch out, take on challenging situations, save jobs and position the economy for the inevitable up-swing.
They have shown themselves to be flexible in terms of adapting to market conditions and the amounts that they are willing to invest. Whereas the market for the mega-deal has pretty much shut down and the lending is nowhere near as aggressive as it was two years ago, mid-sized and smaller deals are very much on the cards. Pushed by the need to meet investment targets, we are witnessing a willingness by PE houses to invest in companies which have a smaller initial investment requirement.
Furthermore, with the banks’ current reticence where risk is concerned, private equity houses are increasingly taking on deals without supporting bank funding. Mezzanine financing options are being used to create a holding position so that in approximately two years’ time, when the banks’ position may have changed, they will be able to shift the balance of the funding structure. This relatively short-term approach is allowing more deals to be done in the current economic climate, whilst demonstrating the ‘can do’ approach by PE houses.
Arguably, nowhere in the Midlands is private equity firms’ appetite to invest better illustrated than in four high profile PE transactions carried out this year by Freeth Cartwright, with total deal value in excess of £60m.
Led by partners Lee Clifford, Karl Jansen, John Heaphy and Phil Baigent, the Freeth Cartwright corporate finance team has:
• advised Funeral Services Partnership Limited in a multi-million pound buy and build investment by August Equity LLP, which committed £23m alongside an acquisition facility from HSBC, providing a significant acquisition war chest.
• advised Lloyds Development Capital on the completion of the £17m MBO of Yorkshire-based bird food manufacturer and distributor Cranswick Pet Products and marine and aquatic products supplier Tropical Marine Centre.
• advised Maven Capital Partners on its £10 million cash injection into West Midlands-based Lawrence Recycling and Waste Management.
• advised management on the buyout of Homeserve Emergency Services (HES) by Lloyds Development Capital for £11 million.
But whilst this illustrates that significant PE deals are still being done in the Midlands, there is still appetite for more. PE funders have the cash available to invest in the right businesses. The challenge they are facing currently, though, is tracking down the right opportunities. In a Bear market, the emphasis has to lie predominantly with the target company to groom their businesses for investment. Many cash-hungry companies appear to be struggling to do this.
Due diligence, for example, is being used to exhaustive levels by private equity houses, and lack of preparation for such intense corporate probing can be the undoing of many a deal.
If companies wish to attract private equity backing, then there must be an intensive focus not just on business planning, but also on the provision of sustainable forecasts and sector growth. Having a demonstrable ‘growth story’ is absolutely crucial.
A strong management team is also important, but not as essential as the above factors. Gaps in experience and ability can be plugged by the private equity funder.
The overriding message then for the Midlands corporate market place is therefore a positive one. Despite the current economic conditions, business funding is still available and the private equity houses are more flexible in their approach to smaller deals in a broader range of sectors.
The emphasis is now very much on business owners, PE houses and professional advisers to work together to ensure that expectations are met and that growth opportunities are capitalised upon.
To discuss further please contact:Lee Clifford, partner
Freeth Cartwright LLP
Tel: 0845 634 2586
Email: lee.clifford@freethcartwright.co.uk
ends - 23 November 2009