Are MBOs back on the private equity agenda?
Are MBOs back on the private equity agenda?
They most certainly are, says Lee Clifford, head of corporate at Freeth Cartwright’s Birmingham office.
Article written by Lee Clifford and published in the Birmingham Post MBO supplement, 10th June.
According to a new study by the Centre for Management Buy-out Research at Nottingham University Business School, private equity houses have returned to dealmaking after a two-year slump, completing £5bn of buy-outs in the UK in the first quarter, more than they achieved throughout the whole of 2009.
Whilst these figures are still massively overshadowed by the dealmaking of the recent ‘credit bubble’ years, when more than £20bn of buy-outs were sometimes seen in a single quarter, they illustrate that private equity houses are slowly regaining their hunger for deals after a two-year shutdown.
Importantly, PE houses are showing themselves to be flexible in terms of adapting to market conditions and the amounts that they are willing to invest. Whereas the lending is nowhere near as aggressive as it was two years ago, mid-sized deals are just as much on the cards as larger deals, such as the recent acquisition of Poundland.
Furthermore, 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.
Also, 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. However, despite this positive attitude to funding by the private equity organisations, there are still major stumbling blocks to more sustained buy-out growth.
One of the key reasons for this is that the debt market is still not providing total support for private equity, even though private equity has been forced to become a more flexible model to survive.
Furthermore, a fair proportion of individuals considering an MBO are deciding to structure the transaction themselves. As a consequence, they face a particularly rocky road to completion. More often than not, today’s successful deals are structured with private equity as this lends credibility when the corporate bid is put to the vendor.
It is worth noting here that, all things being equal, the private equity house is more likely to back an MBO than an acquisition by an ‘outsider’ as in a fragile economic environment, the incumbents are generally viewed as the best parties to take the business forward and generate the all-important profitable return.
One further stumbling block for MBOs concerns the use of due diligence. Currently, a vast number of deals are failing to reach completion because the acquiring party is over-hasty and figures are overly optimistic. Due diligence is being implemented in greater proportions and with renewed caution, highlighting inadequacies and giving no leeway for optimistic forecasting.
As a consequence, MBO teams and their advisers need to make sure that they do not rush into the deal. Indepth due diligence is absolutely crucial for any deal and everything should be frontloaded to this.
Going forward, if MBO teams wish to attract funding, particularly 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 crucial and due diligence is absolutely key to this.
Bearing these comments in mind, the overriding message for the Midlands corporate market place is a positive one. Despite the current economic conditions, business funding is increasingly available and the private equity houses are more flexible in their approach to all sizes of deals in a broader range of sectors.
The onus now lies with MBO teams, funders and professional advisers to work together to produce a tailored transaction journey which ensures that expectations are met, obstacles are overcome and growth opportunities are maximised. The signs are that MBOs are well and truly back on the corporate finance agenda.
ends - 10 June 2010
Lee Clifford, 0845 634 2586, lee.clifford@freethcartwright.co.uk