Nigel Greenaway, gives his views on the current state of the deals market and the impact that COVID-19 may have on M&A activity in the short and medium term.
With the GS Verde group having a unique multi-discipline structure, Mr Greenaway, a Director of both Greenaway Scott and Verde Corporate Finance, is afforded a useful insight of the deals market, with a direct line of sight across both corporate law and corporate finance perspectives.
Has there been evidence of the market slowing down?
The M&A market is still active, but it is fair to say that both buy and sell side are proceeding carefully and pragmatically rather than with any significant rush. Rather than hesitancy, it is more a case of progressing the deals with a weather eye to the immediate future.
Also the detailed deal process itself, the stage after Heads of Terms, is more difficult to progress currently. There is a lot of media attention on the ability of the UK to work from home but in a transaction context the reality is that a due diligence process is undoubtedly slower and more difficult when working remotely.
The equity investment market however is slowing down. There are a number of funds still open for business but also a significant number that are looking at the requirements of their existing portfolio companies rather than seeking new opportunities currently.
Are there examples of industries or deal types that are bucking the trend?
Some sectors are obviously impacted more than others. The vast majority of tech, life science and intellectual property heavy deals are the most robust, and obviously retail and property matters the most negatively impacted.
However it is not a complete shut-down in the impacted sectors either, we are seeing progress on transactions in food, beverage, leisure and hospitality sectors where the core business is currently heavily impacted but the impact is clearly attributable to the current situation with Covid-19.
Conversely and surprisingly the medical supply sector and businesses which are seeing a dramatic short term upswing are finding it equally difficult to measure the effect of the immediate upswing on the short term future trading - is the upswing just an acceleration of orders or an actual increase in orders?
Some start-up funding is also still progressing. In March 2020 Humio closed a £17m round, SoftIron a £28m round and Glassbox a £32m round. All three deals were in the data/analytics sector and that is a clear steer on a sector that is becoming more attractive in the current environment.
Are funders still willing to sanction deals?
Market research suggests that equity investment has been running at a pretty low rate in 2020 with Q1 already quite a slow period prior to lockdown (the slowest quarter since Q3 2014 *source: beauhurst).
Also, the impact of the lockdown will be felt by companies that have already committed to equity investment which is predicated on meeting financial milestones to draw subsequent tranches.
However, the debt/alternative lender market is very visible at the moment and we are seeing a lot of information confirming support for transactions is available from this type of funding option.
So while many funds are still very much open for business and will be encouraged to invest whilst prices are low, they will also have a reduced capacity to complete due diligence and as such we are expecting brand new deals to take longer.
Is there anything further you feel Government or financial institutions could do to help?
The Government announcements have been well received and the intentions seem good. However, the red tape and practicality of getting funds to businesses is proving far more challenging.
The fact a fund is fully subscribed is not something to celebrate unless the fully subscribed funds are getting out to the companies that need them. The funds are fully subscribed because businesses have had a dramatic shock to income and are in need of assistance.
Unfortunately the banks and quasi-government banks have not been able to resist the urge to tinker and add their own qualifications to Government support funds and that has not helped the target companies at all.
Do you anticipate an increase in opportunistic takeovers and more international buyers?
Yes, for sure. Every active 'significantly wealthy' entrepreneur on our roster has been in touch with a list of the type of company they would be interested in acquiring or investing in. So as things stand, it is almost certain that there will be a lot of opportunistic takeovers and investments later in the year.
At GS Verde Group we are having two different conversations internally about our business, the first is very much related to weathering the current storm and the second is about the opportunities we will see in the market and to potentially acquire competitors later in the current year.
We have today received a missive from a large US private equity fund targeting businesses affected by Covid-19 with at least $30m EBITDA and/or $150m fixed assets, The fund has an ability to deploy up to $400m and $80m in a single transaction
So this mean there could be a surge in deals towards the end of the year?
Almost certainly, unless of course the situation worsens. The huge unknown is the future in the US and the future in China. If those markets suffer again in the near future, we could have a very slow long-haul recovery, but if both become open and return to growth then we will see a lot of activity.
My view is that private equity will make a lot of follow on investment in existing portfolio companies, the quasi-government banks like the Development Bank of Wales will also need to make significant follow-on investments.
Opportunities will definitely arise and the difference between this shock and 2008 for example, is that the banks and funding routes are still open for business and will be looking at capital deployment in growth opportunities later year.
It is also pretty clear that some business owners will be keen to cash out in the future, by way of MBO or trade sale. The current crisis has created a business risk that most people have not planned for - and that scare will focus minds about the robustness of long-term strategic thinking versus short term ability to exit.
Nigel Greenaway is CEO of the GS Verde Group, a multi-discipline professional services group, consisting of law firm Greenaway Scott, and M&A finance specialists Verde Corporate Finance.
The innovative group structure enables the Group to advise companies on many facets of mergers & acquisitions, investments and legal matters. For more information please visit www.greenawayscott.com and www.verdecf.com