It’s clear that we’re in for a long and bumpy ride and a very gradual transition to ‘normal’, writes Tom Gallop, Corporate Finance partner at Ashcroft Partnership LLP.  

Many businesses face an uncertain future and some will not survive, but those that went into the crisis with a strong balance sheet and an effective management team should emerge, albeit weaker and perhaps in need of capital and a fresh strategy.  

What does this mean for the M & A market? Many business owners will be reluctant to abandon the valuations they might have enjoyed before the pandemic, so for those vendors for whom maximising value is the objective and timing is not critical, thoughts of a complete exit will have been delayed. 

Those other sellers of businesses, PE firms, who are sitting on assets they might have been expecting to sell shortly, will also be delaying processes. 

Trade buyers are likely to focus on rebuilding their own balance sheets and rethinking strategy, whilst a few will be eyeing distressed assets. 

The banks will be reluctant to lend to new customers whilst they grapple with their new COVID-19 related loan books and work with existing borrowers to avoid default. 

Scrutiny during underwriting is likely to increase dramatically and a whole new range of scenarios (global disruption to supply chains, for example) could be modelled during due diligence.

Despite this, we are not in for a repeat of 2008 when the deal-making tap was turned off. In 2008, one of the chief characteristics of the post-2008 period was a lack of liquidity. The banks could not lend and many PE firms were hamstrung, having invested heavily in leveraged buy outs. In short, there was no money.

In 2020, by contrast, there has never been so much ‘dry powder’ waiting to be deployed and private equity firms are ready to step in. Mid-market private equity firms such as LDC and August have funds raised and ready to be deployed, whilst Foresight’s recently launched East of England Fund boasts a £100 million pool of patient capital set up to assist companies in the East of England.

As Matt Mcloughlin, senior investment manager at Foresight, explains: “Recent months have presented a great challenge for businesses in the region, across all sizes and market sectors. We have an important role to play as investors, partnering with entrepreneurs to secure their businesses, achieve their growth potential, and maximise opportunities through uncertain market conditions. 

“Now more than ever, it is crucial that high growth SMEs are connected with the capital and support they need. We are actively seeking opportunities to discuss investment with interested shareholders and management teams.”

Having spent the last couple of months supporting their portfolio businesses and reworking business plans, PE firms are now looking at buying and investment opportunities. 

The race is on to find quality assets in resilient sectors such as technology, business services and software.  

In addition to providing capital to rebuild balance sheets, private equity firms will be keen to provide an element of cash out to vendors who might be seeking to de-risk after recent traumatic events.

They are also looking to support buyouts of non-core divisions from larger organisations. Valuations should hold up well where private equity is concerned, as they can afford to invest now and take the risk of short-term underperformance – it is the potential valuation in five years’ time that will interest them.

Mark Nunny of Business Growth Fund (BGF) agrees: “Equity investment has a key part to play in the recovery. Balance sheets will require strengthening, debt built up will require refinancing and companies will require growth capital to make the most of the opportunities that present themselves. 

“Having backed over 300 management teams to help them grow their businesses over the past nine years and with considerable capital to invest, BGF is well placed to work alongside management teams to grow their businesses and shareholder value.”

Various terms have been used to describe private equity firms over the years, some not entirely complimentary. But in the months and years to come they could prove to be knights in shining armour. 

By bringing much needed capital, long-term vision and operational expertise, they will be welcomed by many of the region’s entrepreneurs as they try to get things moving again.  

• For further information on how private equity could help your business, contact Tom Gallop, Corporate Finance Partner at Ashcroft, on 01763 209113.