2016 was a surprising year. The seismic Brexit vote was expected to increase business uncertainty and slow the economy. However, in defiance of the dire warnings reported in the media, the volume of transactions remained robust. Businesses decided that the environment remained strong enough to continue deal making.
Thus, activity continues across the sectors. Large corporates, both UK and overseas, are continuing to make acquisitions. But at the same time, we are seeing a number of SMEs look at acquisitions as a way of catapulting their growth.
The funding is obviously different. The larger companies can typically acquire from cash reserves or from existing bank facilities, whilst smaller firms have to raise new bank debt or equity finance in order to acquire.
That brings us to another strong part of the deal environment in 2016: growth capital. There are a number of private equity funds looking to invest in growing businesses, to support them with funding recruitment, capital expenditure and acquisitions.
In general, cheap debt and a surplus of equity available for investment continue to be key features of the UK corporate finance landscape. If a management team can demonstrate that their business is in a growth sector, and they have the ability to take advantage of that growth, then there should be no reason why funding would not be available should they wish to embark on a management buyout.
Indicative of what may happen in 2017 are some of the deals with which we were involved as advisers during 2016.
One deal that perhaps clearly demonstrates the continued attractiveness of the UK consumer market to overseas investors, despite Brexit, was that of DM Midlands, trading as Ashley Manor Upholstery. This West Midlands-based company saw a partial exit of its shareholders in September, funded by a significant investment from the Bangkok stock exchange listed-TCMC plc.
Another deal on which we advised illustrates the ongoing trend for debt only MBOs. Plymouth-based Jubb Consultants was acquired by its management team with bank debt. We also provided due diligence to HSBC on the debt-backed MBO of Newton Abbot-based Pathfinder Park Homes.
A deal that highlights the continuing trend for local authority outsourcing was the carve-out of Smile Together Dental CIC from Cornwall council control.
Our advice in another deal demonstrates the ongoing appetite for large corporate acquisitions of SMEs without the need for new fundraising: the £17m sale of Simulation Systems to Costain PLC.
If you would like to discuss how we can help, please contact a member of our Corporate Finance team.
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