As another potentially perilous financial year gets underway we speak to Andrew Durbin and John Farnsworth, partners at Smith Cooper Corporate Finance, about current trends in the market and their predictions for the second half of 2009.
“The latest CMBOR (Centre for Management Buy-out Research) figures show that the last quarter of 2008 saw the lowest value in UK buyouts in 13 years with deals value reaching just £1.1 billion. The first quarter of 2009 saw signs of improvement, reaching £2.0 billion, but the increase was skewed, as two thirds of the value was down to just one deal.
“There is no doubt that reduced deal flow has impacted larger deals more heavily but the statistics show that the sub £10 million hasn’t suffered to the same level.
“The single over-riding issue is the lack of confidence from all parties involved in a deal (banks, private equity providers, buyers and sellers) which is definitely hindering both the speed of deal processes, and values - although there is, in our experience, no shortage if buyers and seller wanting to transact.
“In order for the market to pick up there needs to be and injection of confidence into the market. Encouragingly, signs of this are already starting to show.
“The private equity providers have introduced some new and innovative finance packages, including debt and equity packages, supply finance and some government backed initiatives.
“For instance, Octopus Private Equity and Aberdeen Asset Managers have each been selected to run a £30 million Government-backed Capital for Enterprise Fund, which will inject equity of between £200K and £2m into qualifying SMEs.
“In addition, the use of Government’s Enterprise Finance Guarantee scheme is gathering pace and helping businesses get the working capital and transactional funds that they need.
“Under the EFG scheme, banks can lend between £1,000 and £1 million to businesses that have a turnover of up to £25 million. The scheme, which is available up to 31 March 2010, provides a government guarantee of 75% of the loan, thereby reducing the risks for banks and hopefully unlocking funding to let deals happen; to date its use for deal funding has been scarce, however.
“We believe that these and other new products and schemes will help in bridging the gap in funding requirements, mitigate the risks for, and increase the confidence of, buyers and lenders.
“There are still opportunities for buy-outs, often arising where there are non-core divisions that need to be sold in order to ease a company’s cash position. Raising funding is of course still tough and a buyer is more likely to get funding if there is a good asset base in place. In addition owner managers need to be realistic on values and generally be prepared to take payment over a longer a period.”
“The key message as we move into the third quarter is that transactions are still possible where the deal is sensibly structured. It is important for the Midlands’ deal-making community to think positively about what can be done, to be creative in deal initiation and structuring, and to work collaboratively. If this is done, we believe there is still room for optimism about the future and we’re confident that deal flow will begin to stabilise, all be it at a lower level than previous years.”
Smith Cooper Corporate Finance, a division of Midlands’ leading regional chartered accountants and business advisors, specialises in advising clients wishing to buy or sell businesses primarily in the £2m to £25m value range.
