If the blunt statistics are to be believed, the M&A market in Wales took a near knockout blow in the 12 months between 2007 and 2008.

Deal values were slashed in half during the period, down from £3.6 billion to just £1.8 billion. Deal numbers told an almost identical story, with the volume of transactions falling from 150 to 83.

Talk to the people on the ground, however, and the mood is much more equivocal.

It’s hard to dismiss the cold, hard facts, but for people at the coal face, so to speak, there’s a glint in the distance that signals a glimmer of hope.

Geraint Rowe, a partner in the Cardiff-based corporate finance specialist Gambit, the largest player of its kind in Wales and the West of England, reports that although the effects of the slump are being felt, some deals continue to be done.

What is noticeable, however, is that there has been a marked flight to quality, a trend which means only the cream of prospective transactions attract funding.

Finding finance

Even then they progress at a snail’s pace – six or seven months to completion is now routine compared to three of four in normal conditions – and then only after the most painstaking due diligence has been completed.

The final hurdle, in transactions where bank finance is required, is whether or not tangible blue-chip security is available to underpin the deal. Says Rowe: “Things are still happening, but only provided they are in the top quartile in terms of quality – and even then we are only talking about mid-tier deals. Anything that relies on bank leverage just isn’t happening.”

One of the main barriers to a busier marketplace is the continuing disparity between buy-side and sell-side expectations (see p16-17), says Rowe. Cash-rich buyers expect to be able to pick up companies at prices vendors consider far too low.

“The perceived risk of acquisition is that much greater at the moment, and I don’t think that owner-managers have adjusted their expectations accordingly,” he says.

As the economy worsens there has been an increase in distressed M&A activity, and an increasing number of companies seeking to refinance, having breached covenants on their existing funding structures.

Rowe’s immediate outlook is gloomy. He foresees tough times spreading throughout 2009 before rallying in the first quarter of 2010.

Raising funds

Tough or not, life goes on, and Guy Davies at Wales Fund Managers is currently raising a £50 million investment pot. He estimates that in ten years’ time WFM will have around £250 million under management, and a list of around 800
high-net-worth investors.

The appeal of this approach is that such investors bring something extra to the party, using their individual networks to stimulate deal flow. Davies calculates that of the £50 million fund about £15 million or so will be invested in Wales in tranches of between £1 million and £5 million. The rest will find homes across the UK.

He says: “We see an opportunity to position ourselves just beneath the £6 million to £10 million level that a lot of private equity houses are attracted to.”

For the time being at least, organisations like WFM are pretty much the only game in town. Davies observes that the large London-based funds are relatively happy to consider propositions in the West Country, but view Wales as being – quite literally – a bridge too far.

“I think the £1 million to £5 million equity market is underfunded all over the UK, and it’s not as though there is a queue of people waiting to step into Wales,” he says. “They seem to be more interested in investing £10 million plus.”

Davies adds: “The businesses we invest in are not perfect. They all have idiosyncrasies, and we generally have to work with the management teams for some time to get them to the point where they are investment grade.”

One of the fund’s major successes was Healthcare Learning, a company providing
e-learning materials to the healthcare sector. Although based in Hatton Garden, London, the business wanted to open an office in Cardiff.

As well as making money available from fund resources, Davies and his partners stumped up £90,000 of their own cash, which they consider an essential element of their investment culture. “We believe the best place to invest our own money is behind our own judgement,” he states.

Regional development

From Peter Wright’s perspective, the recession has thrown up a couple of peculiarities. The first is that Finance Wales, the Assembly-backed independent gap funder of which he is investment director, has seen a 25 per cent increase in completions this year, and expects the trend to continue through the coming year.

The second is that Wales is increasingly being eyed by companies from elsewhere in the UK as an attractive relocation spot.

“That’s partly because, unlike some of the regional development agencies in other parts of the UK which have spent their money and closed for business as of 31 December last year, we still have money to invest,” Wright explains.

In the next 12 months or so, he will be closing off the £30 million fund from which recent investments have been made, and will announce in the next few weeks, the launch of another fund – five times bigger and in the planning for the past two years – to be known as Fund 4, and which aims to raise an impressive £150 million.

It will no doubt be as successful as Fund 3, as long as the banks and other providers of capital retain their death grip on the purse strings. Says Wright: “If there’s one good thing to come out of the recession, it’s that it makes people like us more efficient at creating interesting packages, rather than taking the meat-and-potato approach.”