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5th June 2009
CAT.198/2
Management Buyouts (Birmingham Post)
The recent economic turmoil has significantly impacted on the number of deal transactions being successfully completed in the Midlands marketplace. Ray Harris, Investment Director with Catapult Venture Managers, takes a look at the current situation and assesses the prospects for an upturn in activity.
Nobody would dispute that the world economy has seen a period of unprecedented turbulence and this has greatly affected the well-being of many UK businesses. Consumer confidence has been shaken and, as a result, spending has been curtailed.
The fallout from the banking crisis, which killed off US giants Bear Stearns and Lehman Brothers, and ended the independence of Merrill Lynch, sent shockwaves throughout the financial markets, whilst in the UK we experienced an early taste of what was to come when Northern Rock had to be rescued by the state.
Despite these turbulent times Catapult has continued to invest through the economic cycle. However it takes great resolve to complete deals when the option of delaying to gather more information is available.
Two factors have come together to cause the current reduction in deals done. Firstly the recession has reduced the number of suitable candidates in fit enough shape to do a buy-out. Secondly the lack of available bank funding then further reduces the number of deals that can successfully raise funding for a buy-out.
The type of deals which were being completed early last year in the sub £20m buy out market are now struggling to raise debt at all. The market has gone from a situation of all debt deals two years ago to all equity deals now. Normal service will only be resumed when the banks restore the balance to a sensible debt / equity structure.
Potential investors need to be satisfied that companies are performing well enough in the recession, while vendors need to be realistic about the value of their business. Prices have fallen away from even just six months ago, so unless they need to sell, many will wait hoping values will come back or forecasts are delivered.
We are definitely in a very different market from two years ago. However, this does represent a good ‘buying’ opportunity.
Recent economic indicators suggest that the rate of decline in the economy has lessened and it doesn’t look too far away from ‘bottoming’ out. Trade players who are sitting on significant piles of cash will be waiting to make acquisitions as soon as they believe the corner has been turned. Deal activity should, therefore, see an upturn over the next 12 to 18 months.
The market conditions have been particularly adverse over recent months and even strong management teams will have been tested. However, they will have looked at the current situation and evaluated the threats and opportunities for their businesses: not only in the coming months but over the next two to three years. Prudent FDs will have implemented cost cutting measures early on, kept a tight rein on expenditure, whilst working hard at both collecting and generating cash. Companies making required cost cuts early should avoid major surgery to the business further down the line.
Whilst seeking out ventures that are economically sound, Catapult recognises that some fundamentally good businesses may be struggling through no fault of their own. Those exposed to rather too much debt could benefit by reducing it via an equity stake. A private equity investor can also introduce a pool of well connected and influential Non Executive Directors (NEDs) that will be able to help the business plot a successful course out of the current choppy seas.
Historically, venture capitalists (VCs) have introduced experienced NEDs into deals because they know that this approach is often one of the key determinants between success and failure. This is one factor which hasn’t changed over the last few years.
Early stage businesses seeking funding are likely to find it pretty tough in the current climate, so it’s vital for them demonstrate they are achieving their maximum potential. Clearly, the current climate exacerbates any existing pressures on an enterprise and cracks can quickly appear.
So far this year Catapult has made 10 investments, either new deals or further investments into portfolio companies which - given the tough trading conditions - is a great achievement. It very much proves the point that Catapult is investing through the economic cycle.
What has changed is the number of approaches that we are now receiving from further afield, with a number of approaches from the southern region. This clearly is an indication that funding is far more difficult at present and people are prepared to travel in order to attract it.
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For further information please contact Ray Harris at Catapult Venture Managers on 0121 616 0180 or 07905 349742, or Paul Shrimpton at PSPR Ltd on 0121 354 7311 or 07979 505322.
Note to editors:
Catapult Venture Managers Ltd is a leading private equity fund manager with one of the largest investment teams in the Midlands operating from offices in Birmingham and Leicester. With £80m in Funds under its management Catapult seek equity investment opportunities from £200k to £2m for growing businesses. Contact details for Catapult are 0121 616 0180 (Birmingham), 0116 238 8200 (Leicester) or catapult@catapult-vm.co.uk Catapult Venture Managers Ltd is Authorised and Regulated by the Financial Services Authority. The Advantage Enterprise and Innovation Fund (AEIF) is funded by Advantage West Midlands and the European Regional Development Fund.
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