Opinion: Keith Pickering

It is clear, following the various deal announcements in recent weeks, that the larger private equity funds are back in acquisition mode.

Recent deals completed by H.I.G Capital, Charterhouse, Advent, Bridgepoint and their like demonstrate the drive to start spending the funds raised before 2008 and which most of these funds have now been sitting on for too long.

Most interestingly, (and usefully for shareholders and management teams), these funds are doing deals at decent multiples – they would rather pay a good price for a good business than buy a poor business cheaply – at lower transaction sizes and without the debt element being fundamental at the point of completion. This last point is particularly interesting and is driven by two factors. Firstly, and somewhat perversely, this dynamic is occurring because (as we have seen in our own deal completions) the debt market has loosened up quite considerably in the last four months. Private equity funds have, therefore, got the confidence they will secure a good banking package in a reasonable timeframe post deal, unlike the situation during the majority of 2009 when debt could just not be found no matter how strong the business plan.

Secondly, whilst the debt market has loosened, bringing the debt alongside so it is available at completion is still one of the most problematic parts of delivering a private equity deal. Therefore, private equity houses who are awash with money can (and in some cases want to) part with all of the money required at completion.

The question now is, how long will this last?

It is widely known that the dramatic reduction in bank liquidity post Lehmans has had a significant impact of the ability of corporates and management teams to raise bank debt, particularly when that bank debt is used to facilitate M&A of some kind. Just as we are starting to see some signs of sensible levels of liquidity returning in the transaction market, reforms proposed by the Basel Banking Committee (essentially the global banking watchdog) could impact UK banks ability to lend.

One of the proposals emanating from Basel is that banks would have to deduct their entire pension deficit from their tier one capital ratio, rather than just the next five year’s contributions as is the case now. The potential knock on impacts are constrained lending and dividend policies from the banks affected. Intriguingly, for the Machiavellian Euro sceptics out there, the proposed reform is likely to impact UK banks far more than their US and continental European counterparts as a result of the absence of defined benefit schemes in the overseas competitors.

All is not lost as some analysts argue that the impact in the long term would be negligible as defined benefit schemes are largely closed to new members and therefore deficits should shrink over time. Further, the FSA, which is the UK body responsible for applying Basel proposals, is understood to be sympathetic to the circumstances of the UK banks given their differing pension circumstances. That said, this is all something the relatively fragile banking sector could do without.

There is a window of opportunity in many sectors for privately owned businesses with strong balance sheets to be able to secure acquisitions at attractive prices.

Up until last year the availability of debt and appetite of the City to support the "Big Boys" in each sector largely meant second tier players were priced out from making acquisitions. Now the "Big Boys" are either in disposal mode or at least have an embargo on making any new acquisitions for a period.

A classic example of this is the Building Products Distribution market where, up to early last year, any business that came to the market would have any where between 2 and 5 of the Majors fighting over it. Now the Majors acquisition plans are on hold, opening up the opportunity for the next tier down to be the consolidators, paying the more modest prices they want to and secure the synergy benefits once the sole domain of the Majors.

This window will close again at some point, so now is the time to be proactive about acquisitions. However, I can hear you say, the Banks are not lending so how can I raise the cash to buy something. The truth is the Banks are lending, they are just being far more cautious and selective. Lending to a well run privately owned business with a robust cash flow and balance sheet to make a well thought through synergistic acquisition at a very sensible price is high up on the list as the best use of their more limited funds. The same is true of Private Equity Houses if your circumstances and the acquisition lend themselves to this type of funding.

Market share changes in a recession not in the good times, so take the opportunity.

The market in all sectors is incestuous. In many cases this leads to a healthy environment where, although opportunities are hard fought, there is gruding respect between certain competitors.

Now may well be the time to reflect on this position and decide if this relationship provides the basis to explore if 2+2 can equal 5 and if achieving this result would provide solutions to each parties shareholders objectives.

For example, there will be a number of business owners who are still keen to reduce their involvement in their business but recognise a sale of the business in the current climate may not achieve value objectives. They also recognise the risk of just handing over to the second tier or recruiting an external CEO candidate and that a pure organic growth strategy may take several years to get the value of the business back to the levels required. If, alongside this, there is a competing and complimentary business at a different stage in its lifecycle with a shareholder base and management structure focussed on long term capital value also recognising pure organic growth will be difficult to come by, then starting a courtship maybe a very sensible strategy.

Courtships are not without challenges - however, with a good chaparone strong enduring marriages can result!

Most business owners and managers answer to this question will largely depend on the specific Non execs they have experienced. Unfortunately, this probably means the majority will lean towards the latter answer due to the fact that for every successful businessman operating under this label there are four average and partially retired plc directors, bank managers and Business Link type mentors.

This is a real shame as it will deter many owners/managers from exploring the benefits an NXD can bring to them and their business and, as with most things in life, if you do your homework, define what it is you want and be prepared to pay for the best, you will get excellent value for money.

In addition to the benefits mentioned by Andy[link to JAC blog article], I strongly believe that in the current environment all businesses of any size and complexity need the "outside world" perspective a quality NXD will bring. Over the last 12 months most businesses have had to deal with new issues and communicate those to interested parties (e.g.employees, customers, suppliers, banks, credit insurers, the press). A quality NXD will bring experience from other roles to help you deal with the issues and, possibly most critically, will give confidence to those looking at the business from the outside that the issues are manageable and being sorted.

So if you are an owner or manager reading this, put it on your project pad and give it the time and attention it deserves. If you are an NXD don't believe your flat cv will convince the busy owner/MD to take the jump, be prepared to share case studies of your experience in dealing with all the stakeholders to a business.