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Trade buyers beware – why Private Equity funds are now calling the shots in the SME M&A market
Since the 1990s, Private Equity (PE) funds have been growing increasingly important as a driver of mergers and acquisitions activity. Indeed, PE buyouts now comprise roughly a quarter of global acquisition volumes.
While this trend can be observed on a worldwide level, the influence of PE buyers is especially strong in the UK lower-mid-market, where control investments in SME firms surpassed £3.3 billion in both 2015 and 2016.
Since launching our practice 25 years ago, I’ve seen Private Equity buyers emerge as an important outlet for Avondale’s business sale clients as they assess their exit options. Indeed, PE funds are now a key element of our global network of active acquirers.
Dry powder money – aka rocket fuel for M&A
There are a number of reasons for this trend. Around the world, investors are seeking returns at a time of lacklustre economic growth, low interest rates and weakening property asset classes. Once seen as a niche or luxury product, alternative assets have become a go-to option for institutional and private investors, resulting in a steady growth of fund inflows.
According to PitchBook, a data provider, more than $250 billion was raised by PE and Venture Capital funds across Europe and North America in the seven months to August 2017. Fundraising looks set to eclipse levels seen in 2016 when $344 billion was raised.
“Record sums of “dry powder” PE money is sitting idle, awaiting a home.”
Yet, with fund managers themselves facing a dearth of attractive investment opportunities, record sums of “dry powder” PE money is sitting idle, awaiting a home. Faced with a lack of viable alternatives, managers are looking to acquisitions of SME and lower-mid-cap companies to generate returns for investors.
What makes PE funds such astute acquirers?
With a lack of organic growth avenues, there is of course growing competition for quality acquisition opportunities. However, PE funds offer a number of advantages over trade buyers. PE firms typically enjoy strong relationships with financial advisers. Many also boast superior in-house deal making expertise, particularly with regard to pre-merger planning and post-deal integration.
This is particularly advantageous when buying a small or medium-sized company. PE firms are often better placed than trade acquirers to facilitate a firm’s transition from an entrepreneurial enterprise, often run by the original founder, to becoming part of a larger organisation.
These capabilities grant PE buyers an edge over the competition and can make the difference when it comes to entering into advanced negotiations with vendors.
Furthermore, with significant multinational acquisition experience in their ranks, PE firms are generally well positioned to manage cross-border M&A transactions, particularly where an acquirer is actively sought and the target is from a country with a poor level of corporate governance.
With a restricted bank lending environment making it increasingly challenging for trade buyers to raise cash for acquisitions, I can only see PE firms having a greater role in M&A markets here in the UK as well as overseas in the years ahead. For business owners considering their exit options, this can only be a good thing.
The views expressed in blogs such as the above are those of the author and do not represent the views of the Institute of Directors.
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