After 30 years in corporate finance, I thought I’d witnessed most things but, in respect of the private equity market, I’ve not seen anything quite as crazy as the last few years. Cash-rich private equity buyers have kept dealmakers extremely busy. The momentum has been building for a couple of years and I had expected it to fade, but the consensus is that, in the short-term, it will not.
In recent years, we’ve seen strong growth in transactions involving private equity firms and we see that trend continuing. There is plenty of cash to support buyouts and development capital deals for attractive businesses, as many funds still have cash to invest while others have raised money relatively recently.
There is particularly intense competition among investors able to commit more than £10m per transaction.
Demand is greatest for high-growth technology-led companies. We’re not particularly talking about early-stage businesses with new ideas or technology, but companies which are tech-based and have long-term revenue visibility and growing profits.
For owners of companies with EBITDA in excess of £2m with good growth prospects, the private equity market will continue to look at attractive pricing and deal structures during 2019.
For smaller companies, there are fewer investors and therefore less competition. As a result, pricing is more subdued, but funders are still out there with a requirement to invest.
For our team at HURST Corporate Finance, 2018 was another good year of completed deals, and we are busy in the final throes of transactions that we’ve been working on for some time.
Our recent work on the sale of Fastrak Retail (UK) to Pollard Banknote and of BJL to Dentsu Aegis Network shows that, where there is a strong strategic fit, concerns over Brexit can be overplayed.
We are currently working on several sales to non-EU international buyers, none of whom seem overly concerned about Brexit. However, there is greater caution among UK and European trade buyers, not helped by the continued uncertainty over Brexit.
Post-Brexit, I believe mergers and acquisitions will have to play a part in corporate strategy.
Acquiring businesses within the EU may well be important to maintain supply chains and customer relationships. As a result, British businesses with existing EU operations could prove particularly interesting to non-EU buyers.
Across the board, we remain confident in advising clients to look at a sale during 2019 but, against a patchy economic backdrop, some areas such as retail are becoming almost no-go areas for many buyers.
Notwithstanding our general optimism about market conditions, there is more caution among business owners, whom we find are increasingly inclined to delay big decisions until there is clarity on Brexit.
Although in reality many of these businesses are unlikely to see any direct impact from Brexit, the caution is understandable. So, we have at least a short-term mismatch, with generally enthusiastic buyers and fewer sellers.
Assuming there is greater clarity on Brexit (!!) we expect to see that imbalance redressed during the year, with a possible rush if there is any risk of a general election that could pose a threat of higher capital gains tax rates for owner-managers.
In the long-term, I feel the investment-led increase in deal volumes and pricing will begin to run out of steam by the end of 2020. Our advice to clients is to take this risk into consideration when forward-planning.
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