What sort of company is looking to make an acquisition?
The ones we’ve seen making acquisitions are businesses in the traditional manufacturing, food and automotive sectors. There are common characteristics among successful, acquisitive companies. They tend to have a clear strategic direction in terms of the target business, how they can create value and are able to attract the right level of funding. Management teams are often pragmatic and flexible in their approach to deals. Buyers need to build relationships with the vendors early on, because in the current climate issues will arise throughout the due diligence process and flexibility from all parties is fundamental to getting deals away.
How is the M&A market currently looking?
We’re not seeing the wave of accelerated M&A deals that we would have predicted 12 months ago. If you look at our business over the past year, a lot of the pipeline has been refinancing and restructuring because there hasn’t been much acquisition activity. There will be a trigger point, such as a rise in interest rates, that will be a catalyst and should push the demand for asset-based lending up but I don’t think anyone is able to predict when that might happen.
How are deals being financed?
The best businesses are those that build headroom into additional financing facilities from day one. Because we’re an asset-based lender we don’t tend to be as driven by equity ratios as a senior debt lender would be. In the boom times you saw unsustainable debt-equity ratios for deals funded by senior debt, but now it’s much closer to 50:50. I think the key to unlocking value at the moment is for the vendor to take a pragmatic stance, often with a large chunk of deferred consideration to get the deal away. Deferred consideration payments are featuring very substantially in nearly every deal that we’ve been looking at recently.
Are you seeing more private equity activity?
There’s definitely a greater willingness from private equity firms to use asset-based lending, because it offers a degree of certainty. If you’ve got a reasonable business proposition with asset values that will stack up, such as debtors and inventory, and the support of a private equity house, you can say pretty confidently early on in the process that the deal can be delivered by asset-based lending. This type of lending works particularly well at the moment because it tends to be on a revolving facility rather than traditional senior debt, provided on a reducing or amortising term basis, which might reduce liquidity at a vital time. A company’s cashflow can often be stretched to the limit during the often difficult post-deal phase and a downturn in trade might otherwise leave a company struggling to make its payments.
What’s the general mood for the year ahead?
People are starting to look at what options they have, and because they don’t see a massive recovery in the immediate future they are deciding to sell now rather than waiting perhaps three more years when the value could be pretty much the same. We are seeing some indications of an increase in acquisition activity, with more business plans coming through. With valuations approaching reasonable levels there are some good opportunities that can be completed despite current economic challenges.
Peadar O’Reilly, Regional Director, Venture Structured Finance