finance 23


Private Equity takes the market ’back to the future’


Imagine a pool of investment money where those holding the purse strings are ready and willing to loosen their grip and, for good measure, add their expertise and experience into the equation. That might sound too good to be true but, according to Steve Brown, partner and head of private equity (PE) at RSM Tenon, that is exactly the situation in the market at present


Commenting on the current situation, Brown said: “There is almost a surplus of PE capital available and it is puzzling that more people are not queuing up to take advantage of it.


Brown describes the current economy as being “back to the future“ by which he means a return to the 1980s and early 1990s when transactions had only modest leverage, but were otherwise well- structured transactions and backed by PE.


According to Brown, there is also another big advantage to having PE support and that is the corporate governance role that a PE will bring.


“When it comes to the eventual sale of a business, it will be much more attractive to the trade buyer market having had a number of years with PE ownership,“ he says. “Potential buyers will know you have been through a robust due diligence process, that good corporate governance will be in place, and you have the right information systems and disciplines to make it an attractive prospect.“


It is creating an


interesting dynamic because PE firms are looking for robust, quality businesses to invest in, but there is insufficient demand.“


As a result of this, Brown claims there are some “very, very“ good terms available for the right businesses to take advantage of.


At the same time however, PE investors are facing competition from trade buyers – particularly in-bound foreign corporates with excess cash on their balance sheets – who are looking to “cherry pick“ the best assets and are happy to pay good prices to keep companies with the most potential out of the marketplace.


Brown believes one of the reasons for the lack of PE take-up is that during the heady days of market liquidity and plentiful bank loans, people simply got “out of the habit“ of considering equity as a source of investment.


Brown continues: “Debt has never been cheaper, so some businesses will not countenance the idea of giving away equity. The problem is however, that although debt may be cheap, you cannot get it, and yet people are still not thinking about PE as a proper and appropriate source of funding – but would appear to rather defer investment plans for now.


“By not doing so, they are missing out on a wealth of potential expertise. For instance, there are huge benefits to having investment professionals sitting on your board. Generally PE investors do not just want to give you money, they also want to support you, to share their experience, provide valuable insights and help you grow your business.


“Being an entrepreneur can be lonely and being on your own means you will not necessarily realise your business ambitions. Having PE investors, who can act as a sounding board, can give you


confidence to take stronger business decisions, invest in new processes and explore new opportunities, such as export markets. Yes, you may have to release some of the corporate cake, but you are more likely to end up with a bigger cake at the end of it.“


Although there are signs that the economy is improving, Brown says it is taking time for confidence to return, which may be one reason why businesses are not yet pursuing new opportunities. He also expressed concerns that over the past decade, a whole generation of business people has grown up confident that their bank will support them, even if that meant the bank was technically taking equity risk for a debt return.


Brown continues: “I fear a lot of people are waiting for the banks to fall back to the way they were prior to the financial crisis; they are waiting for improved leverage multiples and a significant appetite to lend to return, but the truth is, where we are is the new normal for some time to come, and ultimately PE will need to become the key source of financing for growth.“


THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – SEPTEMBER 2013 www.businessmag.co.uk


The sectors Brown expects to be prime targets for PE investment include the newly-resurgent British manufacturing and precision engineering companies, together with the more “usual suspects“ such as IT services, specialist high-end retail, and healthcare, both medical devices and the services sector.


And for those businesses that are keen to attract investment, Brown has these final words of advice: “Demand for PE may not be there yet, but we are approaching the tipping point and we do expect to see a pick-up in demand.


“Increasingly, what today’s PE investors are looking for is a strong focus on the management team, the systems and the quality of information. They want to find those businesses who have the potential to become market leaders and who have the ability to be a winner in a chosen sector. Get those areas right and there are huge opportunities to be had.“


Details:


Steve Brown 07972-004221 steve.brown@rsmtenon.com


RSM Tenon offices: Southampton – 023-8064-6464 Basingstoke – 01256-312312 Reading – 0118-9530350 Marlow – 01628-478100


www.rsmtenon.com


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