Monday September 30th, 2019
The liquidity of Private Equity funds represents an opportunity for Businesses
“The current high levels of liquidity available on the market makes this a very interesting period for corporate transactions, and it represents a good opportunity for businesses seeking to finance their future growth projects or for those shareholders who are looking to cash in their stock portfolios.
According to the report recently published by the Spanish Growth and Investment Association (ASCRI), the volume invested over the first 6 months of 2019 has reached €4bn, 62% of which has come from international funds directed towards major operations.
It is worth highlighting that investment in small and medium-sized businesses was worth approximately €820m spanning 31 transactions, 82% of which were for capital investment of less than €5m. Venture Capital investments were worth €357m spread across 242 transactions.
In 2018, €2.2bn worth of funds were raised in Spain, and a further €626m have been raised in the first 6 months of 2019.
Meanwhile, other alternative financial instruments, such as debt funds, many of which are international in nature, are becoming consolidated, and these are bringing greater liquidity and more finance options, both complementary to or as a replacement for the more traditional capital and bank options.
When all this is added to the funds held by financial institutions, private investors and family offices, which are all looking for alternative methods of generating a return through outright or partial corporate acquisitions, then we find we have a broad spectrum of liquidity offers.
How small and medium-sized businesses can capitalize on this situation
This significant liquidity is on the look-out for transactions, i.e. companies that have a track record and a business project that allows them to grow and improve their profitability.
In fact, for larger businesses (with an EBITDA of over €10m), competitive or tendering processes are being organized with high valuations, given market interest and the pressure to invest.
When it comes to SMEs, and from our experience at IMAP Albia Capital, we are seeing significant interest from private equity funds in companies that have an EBITDA starting from €1.5m to €2m, which in contrast to previous years, are being considered as a clear investment objective. In fact, various private equity funds either have or are currently setting up specific instruments for investing in companies with this profile.
In these cases, what is important is that the company should have capacity for both organic and fundamentally inorganic growth through the acquisition or integration of other companies within the sector of an equivalent or smaller size. The aim is to create a larger company by reorganizing the operational structures and industrial resources so as to generate economies of scale, thereby increasing profitability. This is why mature and atomized sectors are once again attracting the attention of these investors.
Another factor that is highly valued by investors is the managerial capacity of these SMEs and the high management motivation in tackling the challenge of growth, which also represents an opportunity for involving the managers of these companies in their success and their ownership. This involvement represents a highly-motivating factor for investors while also being an opportunity for committed managers.
For smaller companies or those with management shortfalls or needs, other private-investor options are becoming available, known as search funds, which, in co-operation with experienced managers, have the aim of buying companies and developing them by providing the management. These funds are highly suited to those companies where ownership is closely linked to management.
In conclusion, this liquidity situation and the search for investment alternatives to the more traditional financial products (funds, the stock market, etc.) is having a very favourable effect on corporate movements in the SME sector.
This represents a good opportunity for businesses that want to grow and that are looking for new partners to share in the project with additional capital, or through alternative funding instruments or methods.
Likewise, it is currently a good time for any owners or shareholders who are considering selling their company to take the plunge and start the process.
This favourable situation should not be taken to mean that “everything is rosy” and that the processes are simple and that company valuations are “sky high”.
Purchasers or investors act in a professional manner, and the processes of acquisition and negotiation are very demanding and time-consuming, with rigorous contracts and agreements.
With regard to valuations, the fact that there is liquidity does not in any way mean that price will be a simple matter resolve.
The value of a company has to be justified and backed up by its results and its differentiating factors when compared to its competitors, and what really needs to be taken into account is its future plans, given that what is being bought or sold is a project, and as such in the future.
There is great interest in investing, although one must remember that investors weigh up and consider their decisions very carefully, and as such these processes are very rigorous (the lessons learned during the financial crash have not been forgotten), and this means those who wish to embark on a negotiating process need to be highly and thoroughly prepared.”