The remainder of 2011 should see a revival in transaction numbers, but based on more strategic concerns than before the credit crunch.
Chief executives in the mid-market are losing their inhibitions about making acquisitions, according to Adam Johnson, managing director of corporate structured finance at GE Capital. He believes that more transactions are on the way, and that is reflected in the firm’s decision to raise its minimum deal size from £100,000 to £500,000.
Explaining the move, John Nelson, commercial leader of commercial finance at GE Capital, comments, ‘It’s indicative of how we saw the market. I think most funders have taken the opportunity to move up the turnover or risk curve to try and deal with businesses that are more resilient.’
In a recent transaction that illustrates the point, GE Capital provided a £13 million financing facility to support the ongoing growth strategy of Targus Europe, a California-headquartered company that supplies laptop cases and accessories.
Looking at the broader UK market, GE Capital continues to see London and the South East at the heart of dealmaking. Says Johnson, ‘In our world of commercial finance, we are seeing a pick-up in activity in the North and Midlands, but I still think future activity will be driven by London and the South.’
Nelson predicts that M&A activity will now have to be more strategic and not just the ‘growth for growth’s sake’ seen before the credit crisis: ‘I think people are thinking long and hard about the implications for business growth and what their goals are. It’s not just about being big any more; it’s about being best, and delivering a return on capital.’
In other forms of asset-based lending, Johnson sees a number of interesting refinancing opportunities: ‘We have a firm view that a raft of leveraged and corporate deals are due for refinancing over the next 12 to 24 months. The question is how these will be transacted and where the liquidity will come from.’
Another question raised by GE Capital is whether banks can absorb the capital losses from the transactions they set up in 2007 and 2008, and go on to provide further funding for those deals. This is where Johnson believes asset-based lending can become a mainstream option.
Nelson anticipates further activity being fuelled by sponsor-led MBOs of distressed targets, and links that to the effect of probable interest rate rises on struggling businesses. He adds, ‘Investors have been waiting for the right moment.’
GE Capital has a broad range of transactions in its pipeline, including refinancings, turnaround investments and transactions involving multiple financial stakeholders. Johnson remarks that, currently, ‘The lion’s share is receivables, followed by inventory and plant and machinery financing.’
Whatever form it takes, Johnson believes that asset-based finance has a growing market to address as the banks remain constrained by liquidity concerns and forthcoming Basel III regulation.
‘We can’t continue in the mode of amend and extend indefinitely,’ he argues. ‘At some point there has to be a market shift to alternative forms of financing.’
Managing Director of Corporate Structured Finance
Mob: 07920 723 923
Commercial Leader of Commercial Finance
Mob: 07801 471 604