4th April 2008
CAT121
Birmingham Post (Deal of the Year)
With the economic outlook looking somewhat depressed Graham Mold, director of Catapult Venture Managers, takes a look at the likely implications on the corporate finance sector and business community at large.
A day doesn’t go by without talk of the current credit crunch and, for both businesses and consumers, the question is just how deep the problem may become and what impact it will have on the economy?
Certainly, a few months ago the corporate finance community was openly discussing the likely impact of the credit crunch on highly leveraged deals at the top end of the market - some running into hundreds of millions of pounds.
It is now increasingly difficult to bring a syndicate together to fund these transactions.
The situation is now impacting across the whole of the corporate finance market with a tightening of bank debt at all levels. Whilst the current Northern Rock crisis has clearly not helped, this really is a symptom of a wider issue within the financial community.
I think it is fair to say that the banks are now very risk averse and this inevitably has resulted in a reduction in their ability to lend at previous levels.
Over the past 10 years there has been a very substantial number of transactions that have been either entirely debt financed - or substantially debt financed -because relatively cheap money was freely available. This situation clearly impacted on the pricing of businesses as people were able and willing to pay more. This is no longer the case.
The good news for venture capitalists and the private equity community is, that with banks seemingly having less of an appetite for debt funding, a higher proportion of private equity is likely to feature in funding packages. Secondly, as we are already starting to see, asking prices are beginning to fall to more sensible levels.
Certainly, those owners who rushed out to sell their businesses ahead of the CGT changes in April have generally had to accept a lower price than they would have in other circumstances. This situation has also influenced a reduction in price levels.
There is no doubt that some caution needs to be observed in the current economic conditions. Consumers are tightening their belts and starting to spend less and being more discretionary in their purchasing decisions. Inevitably, as we are seeing, retail stores are suffering as a result. This means retail is currently viewed as an unattractive sector to invest in ….but every situation is different. A well managed business will always attracted potential buyers – providing the price is right.
Whilst the UK Government’s handling of the economy could be better, much of what is happening to us now was unavoidable. The world economy and in particular the problems that the US is experiencing is clearly impacting on us all.
Some private equity players are currently very careful about which sectors to invest in. There is no doubt that a number of transactions which would have taken place in the more favourable market conditions of 12 months ago, just wouldn’t happen in this market. Whilst retail, luxury goods and advertising sectors will almost certainly be hit by any significant downturn, other sectors are likely to remain attractive. For example, the environment, medical devices and technology arenas remain popular with investors.
Whilst the construction industry will no doubt be impacted upon over the coming months, it will be cushioned by an ongoing need for more houses to be built, the major investment plans in place for secondary schools across the UK, more hospitals and, of course, the 2012 Olympics being staged in London.
What is beyond dispute is that good management teams - operating within fairly buoyant sectors - are somewhat protected from the current trading conditions and will continue to attract investment.
In recent months, Catapult has looked at a number of transaction opportunities that would previously been done on an ‘all-debt’ basis. However, in such circumstances, you need to be aware of the potential pitfalls and ensure that any business you invest in has the potential (and management team) to deliver.
Everyone believes that there will be a slowdown, or downturn, in the UK economy over the next 12 months. The real question which can’t really be answered right now is this: “How deep will the slow down, or downturn be, and how long will it last?”
The bottom line is this: consumers and businesses will curtail their spending as they become less confident about the prospects for the UK economy. Hopefully, any downward spiral will be short-lived.
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For further information contact Graham Mold at Catapult Venture Managers on 0121 616 0180 or 07768 148187 or Paul Shrimpton at PSPR Ltd on 0121 354 7311 or 07979 505322.
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