Strong deal flow to continue
So says Jon Breach, corporate finance partner at professional services firm BDO Stoy Hayward: ‘The credit crunch has led to banks offering less debt. At deals above £250 million, banks are getting together before the deal rather than underwriting the whole debt package and then clubbing together. It’s not impossible to raise money at that level, but it takes time.’
BDO’s Private Equity Price Index, which measures the price to earnings ratio (p/e) of deals involving private equity buyers, shows that, for the third quarter, the valuations for private companies sold to private equity buyers dropped by 14 per cent to 15.1 times their historic after-tax profits. Similarly, the p/e being paid on the sale of private companies to trade buyers has declined in the last quarter, down two per cent to 13.4 times earnings.
Breach speculates that deal-makers in the mid-market might benefit from the current market correction: ‘For companies up to £250 million, it’s good news as you have more financiers concentrating on conducting deals of that size. There’s increased interest in that market.’
In terms of raising funds or refinancing, Breach claims that banks still have an appetite for lending up to £50 million: ‘A bank is usually happy to hold £20 million to £30 million on its own, whereas if you’re looking at a £100 million debt facility, the bank is unlikely to hold that on its own and will want to club together with two or three other banks.’
David Richardson, regional managing director of large corporates for Midlands & South West at Lloyds TSB, says: ‘Money is available – and Lloyds is very much open for business. But it’s costing us more to run our balance sheets, therefore it can be expected that the extra cost will be reflected in structures and pricing.
‘What we’ve found in the past few years is that up until probably six months ago, corporates have been refinancing on a regular basis to take advantage of easier pricing conditions. Five-year loans have been refinancing after two and a half years or so. But over recent months refinancing has become much less common.’
Phil Newborough, CEO of venture capital firm Bridges Ventures, observes that banks are less inclined to provide funding: ‘We are at the smaller end and writing cheques up to £10 million, investing in earlier-stage businesses,’ he says. ‘It is tighter to do new deals.’
Manish Madhvani, co-founder of investment bank GP Bullhound, states the market for deals up to £50 million is healthy: ‘Above that there are some question marks; there’s a lot of due diligence on deals, although I don’t think it’s as bad as some of the press has made out.’
In many ways, if you’re cash rich, now could be a great time to start shopping for companies. ‘Over the next six months, we’ll see more activity in the mid-market rather than at the top end,’ says Breach.