Have private equity and venture capital returned to the M&A market?

Yes in a big way: both in terms of new transactions and, at our end of the spectrum, the refinancing of existing portfolio clients.

I think private equity and venture capital are back in the market for two reasons. First of all they have funds which need to deliver returns and these are coming to the end of their cycles. Eventually they will begin to engage again and when they do they will be considering a wider range of funding options.
 
Secondly, these kind of investors are realising that asset-based lending provides them with the ammunition they need to get deals done right now.

What will this shift do for mid-market M&A?

I think that it’s going to bring a lot to mid-market M&A, which is welcome as we haven’t seen normal levels of dealmaking for some years. There is the occasional trade acquisition, but generally these have been out of receivership.

Looking back on this year I don’t think there have been many conventional trade acquisitions going on, and where it has occurred it has been larger corporates with plenty of cash which don’t require any kind of debt financing.

Is private equity activity going to kick-start the market in general?

There are very different reasons behind private equity activity compared to the rest of the mid-market. Trade buyers will only really make acquisitions when they are getting a good price and it is the right way to grow, or where they are getting a bargain in receivership.

Trade buyers always have a choice, and recently they seem to be preserving their cash and concentrating on their own businesses. Recent research we undertook suggested that those holding on to investable cash are keeping an average of £190k in the bank with 61 per cent holding on to cash as a buffer incase of future financial difficulty, rather than investing in growth.

What private equity activity will do is possibly make trade buyers more aware of what is up for sale and they may view it as an opportunity they have to take.

Has bank debt become more available?

In today’s market I still think it a case of finding alternatives. Obviously for the larger deals the banks are always going to be involved, but I think the private equity houses have found it harder to access that kind of finance.

What I am seeing now is transactions of a better quality. As the ridiculous senior debt packages that were available in 2007 aren’t on the table right now, private equity firms now have to accept that they will have to invest more themselves, and this is why they are increasingly looking to bring ABL into the funding mix.

Do you think the increased activity from private equity will be sustainable during the next six months?

At the moment I’m extremely busy but whether this will continue depends on Europe. There is still a lot of nervousness out there.

I see activity as continuing but I feel that everybody has stepped back a little bit in recent months. Dealmakers thought this was the year to do deals but unfortunately we were hit in July with the blow up of the Eurozone and this in turn has made people more cautious.

Patrick Wilkins
Regional Director
Venture Structured Finance