Steve Currie, a Partner at the global investment banking and asset management firm Alantra assesses the lay of the financial landscape in Carter Murray’s recently published Investor Relations 2018 Trend Report:
There is a huge amount of dry powder sitting in private equity funds at the moment and that is set to continue.
There has only been the odd casualty along the way, such as Lyceum Capital who failed to raise money. But for every Lyceum, there are plenty of others who have successfully raised the amount targeted.
The debt landscape has changed considerably from pre-crisis when you were reliant on a limited number of high street banks for debt lending. The European market is becoming far more like the US market where most of the leverage being lent to fund acquisitions is coming from debt funds. In London there are probably 50 or 60 debt funds we speak to on a regular basis in terms of supplying capital to support private equity-backed acquisitions.
As a result, there is too much money chasing too few deals, meaning if you are a seller of a business this is a great time. Valuations for good quality businesses are at and above the levels we saw at the peak of the market in 2007.
If you are the owner of a private business and are thinking about selling, I would say now is the right time for maximising value, especially given the perceived uncertainties on the horizon with Brexit and further down the line (perhaps) a potential change of government. Plus, we are in a very benign tax regime at the moment with Capital Gains Tax at 20% and Entrepreneurs Relief on the first £10 million of proceeds at 10%, which may not continue under a future more left wing government.
The thing that has the most detrimental impact on M&A activity is uncertainty. If we do not get clarity by the end of 2018 as to what the transitional arrangements for Brexit and beyond look like then funds have the ability to pause for, say, six months – although they will have to start deploying their capital pretty quickly afterwards. At the moment the market is continuing as if there won’t be a significant change between pre and post-Brexit.
The only real impact we have seen with Brexit is exchange rates for which there are positives and negatives. If you are a net exporter of products then your profits have gone up and if you are a net importer then they have gone down.
We have also seen overseas buyers look at the UK and think it is quite cheap to buy there because of the exchange rate changes. In the period since the Brexit vote, we have sold businesses to buyers in the Middle East, Far East, China, Australia, Europe and the US.
Investor sentiment is pretty strong at the moment from a private funding perspective but also looking at the IPO market, where there is a huge amount of activity as the value in the public markets has risen.
Much like in 2006/7, businesses are being sold to a strategic trade buyer, a private equity or through an IPO. We were not in that position a few years ago when the public markets were closed.
There is also now a fourth track with the debt markets because there is so much money available there.
More money is being raised than deployed at the moment, so the weight of funding is only going to increase.
We would like to see more private owners selling stakes in their businesses and more quality businesses being available for that cash to be deployed in. The key constraint in the market is availability of decent deals.
But that is where the market now is slightly different to 2006/7 when everything was being bought – whether it was good, bad or indifferent. Now, if it is not a good business it will not get sold. But if it is a great business it will go for a high price.
For more market insight, read the Investor Relations 2018 Trend Report in full by downloading it here: https://bit.ly/2CUnX70