28 corporate finance Where is the funding?
Corporate finance dealmakers across the region are saying that as access to bank lending has become difficult, alternative funding sources now support many of their transactions. Richard Willsher writes
The Bank of England’s October 'Trends in Lending' reported: “The stock of lending to UK businesses overall contracted in the three months to August, as did the stock of lending to small and medium-sized businesses...”. Meanwhile loans made by the big five business lenders - Barclays, HSBC, Lloyds, RBS and Santander - under the £190 billion new credit for business ‘Project Merlin’ was broadly on target after the first three quarters at £157b. Of this total £56b of the £76b earmarked for SMEs was also in line with the overall plan.
On the face of it efforts to break the logjam in business bank credit seem to have had some success but the experience of local arrangers and advisers tells a slightly different story.
“It has been a tough environment,” said Adam Dowdney, a partner at legal advisers Pitmans. “Getting deals over the line has become increasingly difficult. There is a limited amount of cash to finance deals in the market from bank funding. That has made deals difficult but private equity has money and this has funded a number of transactions. There has been deal flow but it has not been as busy as it was three years ago.”
“I have some sympathy for the banks,” added Andrew Beet, director at Wokingham-based accountants and advisers Rice Associates. “On the one hand they get the blame for getting us all in a mess in the first place through irresponsible lending, and on the other they get it in the neck for not lending enough. At the same time the difficulty of getting the banks to recognise that a deal is good is what is holding things up in many cases and slowing down activity generally.”
Which is by no means the same thing as saying that deal making is in the doldrums. “In the past six months we have seen much greater deal flow from businesses looking to raise equity to help them grow,” explained Kirsty Sandwell, Baker Tilly’s managing partner for corporate finance in the south east. “If you want to expand into overseas markets, historically banks have been quite supportive. There is a lot less bank funding around now so people are turning to equity providers to support that growth. They accept that they may own less of the equity but have a smaller slice of a much bigger pie when they eventually come to sell.”
In fact the involvement of private equity is the standout trend in the current corporate finance scene according practitioners. “A lot of the deals that we’re doing have a private equity element in them,” said Pitman’s Dowdney. “Private equity are both sellers in the market to realise their assets and they are also doing secondary buyouts. They are a very important player in the current market and they see this time when values are slightly down and multiples are depressed as being where they can generate significant returns for the future.”
The banks meanwhile are active in a number of ways. Andrew Clayton, managing director of the financial sponsors group for the south of England at RBS, points to local deals such as the increased financing facilities for Hampshire-based Micheldever Tyres where it led a club of lenders including GE Capital, HSBC and Santander and its £10 million backing for private equity investors in Salisbury-based Glenside Care Group. Clayton notes that his team has had a busy year with a good pipeline of deals stretching out well into 2012.
Significantly US-headquartered corporate finance provider and asset-based lender GE Capital has appeared in several of RBS’ club deals. GE Capital in the UK has grown its asset-based lending business to $1.3b (£823 million) based on principles established in the US. Their business development director for London and the south east, Jon Hughes, says, “The opportunity for us as an independent finance company rather than a clearing bank is clear. We continue to be proactive and to increase our share of the market. Bank customers are willing to look for working capital outside of the main four clearing banks in a way that they weren’t before and there is likely to be more transactional activity in the next 12 months. Both of these factors create an opportunity for us.
Reading-based law firm Boyes Turner has also been busy this year, according to Philip Tranter, a partner in the firm’s corporate group, and he also expects this to continue into 2012. But Tranter along with everyone else we spoke to is concerned about the repercussions of the Eurozone crisis.
“The short term is looking good for us,” agrees Andrew Thomson of HMT Corporate Finance in Henley, “but the outlook for the economy is pretty unclear.”
“If we have another banking crisis then all bets will be off,” according to Baker Tilly’s Kirsty Sandwell. “We are already seeing some European buyers starting to pause and cull all merger and acquisition activity. While they have been very active in the past 12 months we are now seeing deals put on hold as they wait and see how the Eurozone crisis unfolds.”
For the time being deals are being done and funded quite often from alternative sources to bank lending. 2011 has proved to be an active year for many in the market but, as in 2008, the threats come largely from beyond the shores of the UK and their consequences are difficult to predict and impossible to control.
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