Patrick Wilkins, regional director for London at Venture Structured Finance, talks to James Harris about re-energising the M&A market
Patrick Wilkins, regional director for London at Venture Structured Finance, talks to James Harris about filling the funding gap and re-energising the M&A market
With the credit pipeline from high street banks still running dry and private equity on the back foot, providers of asset-based lending (ABL) are increasingly relied upon to finance deals.
Patrick Wilkins, regional director for London at ABL provider Venture Structured Finance, says: ‘High street banks are reluctant to do a lot of working capital lending to businesses, but we’re very happy to step in. We’re content to work with lenders that only want to work on the fixed assets, while we concentrate on optimising cash generation via receivables, but we’re also happy to do both.’
This flexibility has stood the firm in good stead, not least in its recent refinancing of AIM-listed land development and brick company Michelmersh Brick Holdings. The ABL arrangement comprised a receivable and inventory finance facility of £5.5 million. Unusually in a refinancing deal, the incumbent bank remained with Michelmersh. Wilkins explains: ‘We got involved on the working capital side of things, so we managed receivables and inventories, while the bank continued to provide the existing longer-term facilities.’
Clearly, it was important to be satisfied with the asset base at Michelmersh, which for its most recent year-end reported revenue of £24.2 million (2007: £24 million). Adds Wilkins: ‘We have to be satisfied that collateral is very good indeed in order to go ahead with a deal like this, where all we’re relying on is receivables and inventories. It’s no accident that most of the market is looking to pull back on inventory lending – having a lot of inventory on the books to get rid of is not an easy thing to do in this environment. That’s why it’s important for a provider to use their experience to work in partnership with the client and help them overcome any challenges that might lie ahead.’
The arrangement appears to be working well. Dave Edwards, managing director at debt advisory firm Litmus, which recommended Venture to Michelmersh, says he thought the two would make an effective match in this instance. ‘At Litmus, we spoke to four or five alternative finance providers and we picked Venture. We chose them because they understood the proposal. They understand the needs of AIM-listed companies.’
Despite the difficulties of raising funds generally, there has been more interest from AIM companies in ABL, says Wilkins. ‘I think a lot of businesses are looking to get their finances in order. People have been too leveraged in the past and they are finding it difficult to raise more debt to take advantage of an upturn. We can come along and provide robust and responsive funding that they can rely upon, and have the flexibility to work alongside other lenders.’
Not surprisingly, there has been a marked change in the kind of deals Wilkins has been working on since the recession hit its stride. Although the appetite for refinancing has not diminished, M&A has been hit hard.
‘Historically, 75 per cent of our business was centred on M&A, and the rest was refinancing. Now it’s the other way round. Two years ago there was a spate of MBOs, but that side of things has been very quiet recently. Whether that’s because vendors’ expectations are too high or because there’s not enough money, it’s hard to say. It’s probably a mixture of the two.’
While ABL providers are happy to fill the gap in the market, a real revival of M&A activity may come from another source: ‘The future of M&A is in the hands of the private equity community. For over a year, they have focused on managing their portfolios rather than lending more money, but they are also increasingly awakening to the benefits of including ABL as part of the funding mix. We’re waiting for them to kick-start the M&A market.’
Wilkins is confident that the market will improve, but in the meantime, he says, ‘We are happy to do business and we’re actively seeking deals. There just aren’t that many M&A opportunities around at the moment.’