Amid an atmosphere of greater caution regarding deals, private equity houses are moving away from a generalist approach and towards more sector-targeted portfolios.

Amid an atmosphere of greater caution regarding deals, private equity houses are moving away from a generalist approach and towards more sector-targeted portfolios.

As levels of risk assessment increase in mid-market activity, investments by private equity firms are becoming increasingly sector specific.

According to Charles Simpson, partner at Saffery Champness Corporate Finance, there has been a greater rationalising of portfolios. He sees this development as a combination of heightened caution in dealmaking and a desire to profit from the synergies that can arise through building up portfolios of ‘like’ businesses.

‘From a risk perspective, it’s the understanding that you really have to know and work in the sector to make the right kind of investments,’ Simpson adds. ‘Also, there are some sectors that are ripe for consolidation and growth through acquisition.’

By acquiring a company and then adopting a buy-and-build strategy through the purchase of similar businesses, Simpson says that there are opportunities for cost savings. And, as a result, he argues that the private equity market is tending to move away from big, generalist private equity houses, believing that the focus is on more sector-targeted portfolios.

Simpson is also seeing more exits from private equity investments through market admissions as the equity markets continue to recover. Saffery Champness acted as the reporting accountant on the £4 million IPO on AIM of analytical instrument business Microsaic Systems in April.

Simpson adds that Saffery has been working on three market admissions in recent weeks, a trend that he believes supports the belief that the IPO route is not as closed as it has been in the recent past.

He also believes that increased awareness in the market has also trickled down into the due diligence being carried out by businesses these days, with early-stage work being carried out on a much more frequent and in-depth basis.

Simpson comments, ‘Our clients are very focused on due diligence and are looking at it not only from a legal and financial perspective, but also focusing on commerciality and the market.’

BROADENED SCOPE

As a result of this shift in expectations, Simpson adds that Saffery has now broadened its scope into the commercial aspects of the market in which the particular target or company might operate.

‘Due diligence will quite often be undertaken early and then drive the rest of the deal in terms of time frame,’ Simpson states. ‘Clients are now waiting to see if the initial due diligence comes out ‘clean’ before they then progress with the rest of the transaction.’

The preliminary work is carried out with the intention of identifying what Simpson calls ‘red-flag issues’, ensuring that there are no problems that could pull the whole deal apart.

‘It’s now much more than a means of just dotting the i’s and crossing the t’s – it’s a fundamental part of the investment decision,’ he adds.

SELF-REFLECTION

An extension of this development is the increase in the amount of self-review being undertaken by businesses prior to a transaction, believes Simpson: ‘They are much clearer about what they think a business is worth and where there are issues that might bring value down. Clients are much more clued in.’

The rise in the importance of due diligence is also affecting the speed at which deals are now being completed, according to Simpson, with greater caution meaning that clients are now more apprehensive about ‘pulling the trigger’ on a deal.

Simpson comments, ‘Warranties are much tighter – buyers are looking for the vendors to sign up to pretty wide-ranging warranties to make sure that if anything goes wrong post-transaction then there is some comeback.’

Charles Simpson,
Partner and Head of Corporate Finance,
Saffery Champness
Tel: 020 7841 4176
Mob: 07798 691485
Email: charles.simpson@saffery.com
Web: www.saffery.com