RG Corporate Finance has indicated that the current economic headwinds facing the UK are being reflected in the nature and type of transactions on which it is advising and highlights the many investment and growth opportunities available for businesses.
Having predicted earlier in the year that sectors such as technology, healthcare, education and professional services will remain highly active in the coming months, while industries such as bricks and mortar retail and hospitality may find it more challenging to attract investment as the performance of such businesses softens due to reduced levels of residual income and consumer spending, RGCF is seeing this evidenced in the recent transactions the firm has advised on.
With the current challenges in the UK economy, one of the most noticeable trends is the prevalence of Management Buy Outs (MBO). With a reduction in the number of UK listed and privately owned trade acquirers looking to make acquisitions due to businesses being more cautious and more internally focussed shareholders are looking internally for their potential purchasers when looking to sell.
These MBO transactions are more frequently being supported and indeed funded by debt funds rather than Private Equity (PE) investors who today are more cautious when it comes to investing in new businesses, sectors and management teams, with many PE firms currently more focussed on deploying their capital to help their existing investments grow and scale by making bolt-on acquisitions, as evidenced by LDC backed Iamproperties recent bolt on acquisition of Proptech business, VTUK, which RGCF advised on.
Shard Credit Partners, which is a London based debt fund, is one of many funders that are able to provide management teams with the funding required to execute MBOs, and has only this week provided the management team of North East-based engineering and automotive-focused training provider NAC Group with the funding they required to acquire the business.
Alastair Brown, CEO of Shard Credit Partners, said: “Shard Credit Partners continues to seek opportunities to back strong management teams in the North East to achieve change of control transactions or execute on buy and build acquisition strategies. We focus predominantly on funding those businesses that generate stable, recurring revenues with sticky, contractual customer bases and high barriers to entry, as these will typically be more resilient when the UK encounters the approaching economic storm and likely recession.
“We expect the economic challenges to generate strategic bolt-on opportunities for our existing portfolio, which we will be keen to support by providing additional financing. Of course, we expect to rely upon our close ties with strong regional corporate finance houses, such as RGCF, to help us to identify, negotiate and execute such opportunities.”
Another source of funding that remains an option for management teams is from UK high street banks, including NatWest, which recently provided a seven-figure funding package to support the MBO of North East-based precision engineering company, PDQ Engineering Ltd.
With one of the impacts of the shift in the economy being the fall in the value of the pound, there is also increased interest in UK businesses from international acquirers and investors.
RGCF has extensive experience of working with international companies, including, most recently, Milan-headquartered Gi Group, which operates in more than 100 countries across the globe, who RGCF helped acquire Midlands-based Encore.
Carl Swansbury, Partner and Head of Corporate Finance at RGCF, said: “The caution that we predicted would be seen in some areas of the investment, funding and M&A market is now starting to be evidenced.
“This is creating many opportunities for management teams that are looking to execute MBOs and benefit from the use of debt funding and international investment. While interest rates have risen to 3%, they are still relatively low in comparison to where interest rates were around 20 years ago, which means this kind of debt funding remains a viable option.
“The current exchange rates are also opening the door to more interest from international acquirers looking to secure UK assets. Certain sectors, such as human capital and technology, are very mature in the UK and are therefore attractive to acquisitive companies from around the world who are looking to extend their capabilities and global footprints, as was evidenced by Esker’s recent acquisition of a 50.1% shareholding in procurement Software as a Service (SasS) provider, Market DoJo, in a transaction which RGCF advised on.”
Tom Pollard, Corporate Partner at Ward Hadaway LLP, said: “Notwithstanding the economic pressures impacting the UK and international markets, debt funded MBOs continue to be a strong option to release value for business owners operating in sectors which are insulated from the wider economic pressures and who have built up strong underlying management teams. It is great to see the likes of Shard Credit Partners continuing to support the region’s businesses in achieving both MBO opportunities as well providing funding to their existing portfolio to execute buy and build opportunities. We expect to see a growing number of MBOs executed in the coming months.”
The Chancellor’s recent Autumn Statement had the potential to impact the M&A market if increases had been made to the rates of capital gains tax (CGT), though these fortunately did not come to pass. The lowering of the gains tax free allowance is expected to have little effect on transactional activity.
Simon Whiteside, Tax Partner at RG, said: “While the reduction in CGT allowances is part of a package to increase income into the Treasury, it should have little effect on the M&A market. Raising the headline rate of CGT could have caused some concerns, but the impact of the tax free allowance change will be minimal. Similarly, there could have been clear indications that increases to CGT rates were planned in the future, but nothing was said, or appeared in the supporting information to suggest this. This is all important because transactional activity helps to drive investment and increases employment opportunities, which are essential for wider economic growth.”
Carl added: “Our market knowledge and ability to help companies maximise the options available to them despite the current economic headwinds is helping RGCF grow its reputation as a trusted CF adviser. As we complete the final quarter of 2022 we enter the coming year with a strong pipeline of transactions working with a diverse and complex range businesses on a number of exciting transactions and strategies, which will highlight and indeed showcase the significant opportunities the current economy holds for ambitious, growing and well-funded businesses. In any market it is important to remember that fortune always favours the brave.”